Bjorn Forfang (CFA Institute): “FinTech is Going to Fundamentally Transform this Industry in the Next 5 to Ten Years, if Not Sooner”

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Every time Bjorn Forfang, Deputy Chief Executive Officer at CFA Institute, travels, he always gets asked the question of what could be his specific advice on how capital markets and how finance industry in certain countries should behave. His answer is always the same: “Although there are differences in financial markets, the very core of what we are trying to accomplish is exactly the same in every country around the world, and it comes down to trust, ethical and professional standards, and that is the core value proposition that exist whether you are in Brazil, Chile or Uruguay, or any other country in the world,” he stated at the “2018 Latin America Investment Conference,” an event jointly hosted by the CFA Institute and the CFA Society of Brazil in Rio de Janeiro.

The CFA Institute wants to globally lead the investment industry by globally promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of the society. And, as presumptuous at this may sound, they really mean to benefit of the society: “We simply believe firmly, that fair and free capital markets underpinned by strong ethical values and highest professional standards is critical for prosperity on the financial industry. The financial industry has contributed significantly to society, and I cannot think on how many countries could actually achieve prosperity in the long run and reduced poverty without free and fair capital markets. Financial markets are the intersection of capital and ideas. There are people that may have ideas but no capital, and there are people that have capital but no ideas, it is that intersection what creates prosperity for nations and that is what we believe, and that is why the benefit of society is such an important part of the value statement of what the CFA Institute stands for,” he added.

The CFA Program started out 60 years ago, mostly in US and Canada, but now is a global program, with a 45% of growth in the Asia Pacific region and a 33% of growth in the Americas region, where the growth of the mature markets is flatting as well, and most of the growth comes from Latin America, being one of the fastest areas of growth for CFA Charterholders. “Argentina and Uruguay had a combined society because Uruguay was not big enough by itself. But once Uruguay obtained more than 50 members and had a path to reach 100 members, the inside rule of the CFA Institute to create a CFA Society, they obtained the approval from their board and became a separate society. Colombia will be the next country to have a CFA Society in Latin America, they already have 80 members and 400 candidates.”

The CFA Societies of Latin America interact among them because they have similar issues. They are developing economies, they have a sort of immature capital markets when compared with some of the developed markets, and they cooperate on multiple levels. And they also share best practices when it comes to member and continuing education events. Moreover, the Latin American advocacy look forward to preserving best practices issues and concerns among capital markets challenges.

The lack of trust

According to Forfang, one of the biggest problems in the financial industry is the fundamental trust gap that has been widening for many years, between what the financial industry delivers and what the costumers and clients perceive are delivering. “The biggest problem is trust, we have conducted a survey all over the world, with 3,000 to 4,000 respondents from institutional and retail investors, released on March 28th. The survey asked about the concept of trust, about the quality of the financial advice that clients obtain and about attributes that the clients are looking for among other questions. In Brazil, there is a decent amount of people who still trust the industry. But Brazilians in this survey are also extremely skeptical, that trust is not something that they take for granted, is something that industry must deliver on, every single day, and that is a challenge for us, but is also an opportunity to seek for much higher professional standards in other to meet that challenges that we have, among our clients. The trust gap can be closed in a couple of ways, as trust is really about two things: credibility and professionalism, putting both together is a solution to narrow the trust gap.”

In the path of reestablishing the trust, Forfang believes that honesty and transparency are key. “Fees need to be transparent. Products, if they are complicated need to be fully explained so people who buy it understand exactly what it is that they are buying, and honest about expectations. There is a gap between how people think how they may live on retirement relative to what the actual reality is in every company of the world, and I think is up to us to be honest and explain what it does mean. There must be a commitment to put the client first when we are giving advice to a client, it interest must be ahead of our interest and that of our employers.”

The other challenges

There are other problems that the financial industry is facing: active management does not seem to be delivering value after fees, which is why you see the proliferation of passive moderate ETFs, quantitative strategies are reaping away alpha opportunities, replacing human beings with computers, and the result of all of that is margin compression. Also, the rising of markets for the last several years certainly have added a secular market compression to the industry, that leads to consolidation of asset management firms, as they are trying to build scale in distribution, technology and product offering.

Another challenge is fintech and its effect in the financial services industry. The CFA Institute firmly believes that Fintech is going to fundamentally transform this industry in the next 5 to ten years, if not sooner. Lastly, there is the regulatory scrutiny that the financial industry faces. These are the reasons why there is a need for full and complete commitment to lifelong learning by the professionals of the financial industry.

“There are topics in the curriculum of the CFA Program that are static that will always be, like the fundamental analysis, asset allocation, portfolio strategy, quantitative strategy and economics. Those things will always be in the curriculum. But then, in our continuing education program, professionals can rotate in and out topics that looks like they are going to come up, but not sure, like some aspects of fintech or blockchain. We want to make sure that our members are up to date with the latest thinking, but that is different than putting it into a curriculum,” he concluded.    

Zeina Latif (XP Investimentos): “Brazil Tends to Fail Managing Success, But it is Not that Bad Managing Crisis”

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According to Zeina Latif, Chief Economist at XP Investimentos, Brazil tends to fail in terms of managing success, but it is not that bad managing crisis. “If you take Cardoso’s or Lula’s first administration mandate, both started with huge challenges and they ended well, and we saw the reflection and the outcome of their policies. So, I think that ironically, the most serious fiscal crisis of Brazil’s recent history has a good side of the story, as it leads to force Brazil into rethink government intervention in economy and into eliminating those policies that are inefficient. It is really challenging, but the history tells us that we can do it. Our problem is that we cannot manage very well periods of success”, she stated at the “2018 Latin America Investment Conference”, an event jointly hosted by the CFA Institute and the CFA Society of Brazil in Rio de Janeiro.

Brazil suffered a significant draw on its productivity after being affected by the measures taken by former President Dilma Rousseff. The new government implemented a material shift in economic policies that are believed to be working, and that soon will bring some improvement in productivity as well. Unorthodox price policies that led to a high consumer inflation were removed, the new government understood that this issue was the first thing that needed to be tackled. “Regarding consumer inflation, we need to understand that the current decrease was not because the Central Bank was lucky, or because the forex exchange behaved favorably against other major currencies. We need to recognize that this low inflation is like the patient’s fever that is receding because the doctor was right on its diagnosis and on the treatment as well. This government understood the urge of the tackling fiscal prices and their strategy was correct”, Zeina added.  

What can be expected for the coming years in Brazil?

Brazil is facing one of the most serious fiscal crisis in its history. In October, voters will elect another president who will have to face significant challenges. “Brazil needs really bad to stabilize its debt to GDP ratio, otherwise, macroeconomic stability will not be possible. We have clearly a problem of sustainability of public debt and the pension reform is the bedrock of the fiscal adjustment. I do not have many doubts that the next president will need to remember that politicians always consider cost-benefits of their decisions. In terms of political ambitions, is not really a good idea for President Temer to approve a pension reform now. It would have a huge political cost and the benefits will be reflected in the mandate of next president. In a scenario in which markets were really concerned about this issue, there would be a significant benefit of doing the pension reform this year, but clearly this is not the case. Markets have given the benefit of the doubt and are expecting this reform to be accomplished for the next president. But, anyway, this is something critical, we will not be able to see sustainable growth in Brazil while there is macroeconomic instability”, she said.

Brazil needs to look forward and implement structural reforms, the good news is that the current administration has already started. Brazil needs higher productivity gains to compensate for the end of the demographic dividend, the gap between working force and people out of the labor force is going to decrease in the next five years, and it means lower growth potential for Brazil. The next government will need to accelerate reforms to prepare the country towards the end of the demographic bonds, otherwise potential growth in Brazil’s GDP will be 1% or 1,5%, a mediocre growth rate for an emerging economy. Other matter that will be crucial for Brazil will be to open the economy for international trade, as the country needs to increase competition. 

“I believe this is one of the most critical moments in Brazil history, but I also think there is a good chance of seeing good news in the next government. In my opinion, the risk of populism has decreased a lot. We see this more stable economic environment, in which unemployment rates and the fear of losing jobs still very high, but we are not seeing protests in the streets. We are seeing society that has calmed down”.

Economy is an important subject in Brazil, a country that has gone through two impeachment processes since its democratization and in both cases the processes were initiated following a collapse in the economy. “Now we have a president that has one digit of approval rate, but the streets are not asking for his ouster. All the possible candidates for presidency are looking for talented and renowned economists to be their finance minister. Politicians understand that there is no room for more mistake on the economic policy and they are trying to show their vision on the economy”. 

Finally, the golden rule, a constitutional rule established to avoid the issuance of new bonds by the government to finance current expending, acts as a cap. The next president elected will need to gain flexibilization on the golden rule. Also, there is a significant change in the economic debate. “We are now discussing structural reforms on macroeconomic policies and pensions, and it is something that really matters, because 10 years ago, when Fernando Henrique Cardoso tried to approve a pension reform neither the press nor the private sector supported him. They did not understand the need for a reform. Today, nobody is denying the need of reforms. Politicians in Brazil have become very pragmatic and they use cost-benefit analysis all the time. The discussion is whether the next president will be ambitious enough and will have political conditions to do something different. Today, the question is whether it is going to be a good reform or not, and it is a completely different question. Although the challenges are huge, Brazil is better positioned to tackle these obstacles. Our politicians are not ideological, they are pragmatic”, she concluded.

Old Mutual Sold 100% of its LatAm Operations to CMIG International

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Old Mutual vende el 100% de sus operaciones en Latinoamérica a CMIG International
Foto cedidaCourtesy photo. Old Mutual Sold 100% of its LatAm Operations to CMIG International

CMIG International, a Singapore-based holding company, has signed a contract with the South African group Old Mutual to acquire 100% of its business in Latin America. The operation, which is still pending approval by the corresponding authorities, would include, as it has transpired, the companies Old Mutual Mexico, Old Mutual Colombia and the Latin American investment adviser Aiva. It is also speculated if Old Mutual plans to sell its business in China.

The buyer, China Minsheng Investment Group International (CMIG), is a private investment holding company founded in August 2014 with 59 companies and with a registered capital of 50,000 million yuan. CMIG focuses on emerging sectors and actively promotes industrial modernization and economic transformation. The price of the transaction was not disclosed but according to international media, CMIG would have paid close to 400 million dollars in this operation.

The executive president of CMIG International, Kevin E. Lee, wanted to emphasize that “Old Mutual Latin America is a well-managed company with constant and sustained growth. It has always prioritized the interests of its clients, which is aligned with our values as a company. At CMIG International, we have a long-term commitment to strengthen and grow the company in the region. The acquisition of Old Mutual Latin America is an excellent platform for CMIG International and its entry into the regional market, which has great potential.”

In this regard, Lee added that, after carefully analyzing Old Mutual Latin America, “we are very excited about the prospect of becoming its shareholders. Our investment thesis is to find good assets, managed by exceptional teams, in such a way that we can guarantee the continuity of the business.”

According to the firm, Old Mutual’s decision to sell its business in Latin America follows a strategic review of its business, which concluded with the decision to concentrate on its operations in Africa. The presence of the firm in Latin America dates back to 1959 in Mexico, where it began to operate as a reinsurer under the Skandia brand. Subsequently, the company was established as an insurer and an operator and distributor of investment funds under the same Skandia brand; which had a very important growth in Mexico. Now this brand, recognized in the institutional field, will come back to represent the business in the region.

David Buenfil, CEO of Old Mutual for Latin America and Asia, said that “we are very proud to have an international investor of the stature of CMIG International, who believes in the growth potential of our region. This is a well-known company in Asia, and with a very good reputation. We are also very excited to know that they value our much-loved Skandia brand, and that they plan to return it to the market once the transaction is closed.”

Old Mutual Latin America includes pensions, life insurance, mutual funds, a broker-dealer, and an investment advisory with assets under management of over 13.5 billion dollars.

According to Julio César Méndez Ávalos, CEO of Old Mutual Mexico, “this is great news for all our clients, employees, advisors and strategic allies. CMIG International is a company that has valued our great potential and is committed to a continuity of our business model, as well as our human capital and management team, all our clients can rest assured with their investments and products because they will continue under the professional management that has distinguished us in these almost 25 years that we have participated in the Mexican market.”

Mauro Miranda: “CFA Institute is Present in Brazil to Add Resources”

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CFA Institute and CFA Society Brazil jointly hosted the second edition of its “Latin America Investment Conference” on March 1st and 2nd. After having held its first edition in Cancun, Mexico, this time the city of Rio de Janeiro, Brazil, was chosen to bring together more than 240 investment professionals.

CFA Society Brazil, the local society of the CFA Institute in Brazil, was founded in 2004, has more than 1,000 members and expects to have an annual growth of 15% percent in the next four years, contributing to exceeding the figure of the 2,000 members in Latin America.

Mauro Miranda, CFA, an investment professional specialized in fixed income, including structured debt and private credit areas, is also the president of the CFA Society Brazil since 2016. During his two years in office he has managed to open an office in Sao Paulo for hosting the society’s activities, to make once again Rio a test center and to hold the annual investment conference in Latin America was held in this city.

In the last 14 years since the CFA Society Brazil was founded, with some 50 members, much has changed, both economically, in the political arena and in the development of markets.

“In 2004, the global economy was going through a period of growth and attractive prices for commodities, Brazil benefited from these circumstances and went through a promising period until 2007. Meanwhile, in the 2002 elections Lula won the presidency. During his mandates, there were no major changes in terms of economic policy. There were certain ups and downs, but these were the usual ones in any normal business cycle. Brazil was then affected by the crisis of 2008, obtaining a very negative GDP in that year, recovering later like many other economies. Later, we began the period in which Dilma Rousseff took the presidency, implementing very unorthodox economic measures. The GDP fell quarter after quarter, not recovering the path of growth until after its deposition.

In terms of capital markets, a much more robust regulation has been achieved. The Securities and Exchange Commission of Brazil (CVM) has issued several instructions that were very important to facilitate the establishment of banks and asset management institutions in Brazil at that time. As an emerging economy, Brazil is a country in progress. In July 1994, the Real Plan was implemented, the plan that introduced the current Brazilian currency and ended with a period of hyperinflation of 80% per month. Then, the regulatory agencies and certain economic policy measures were created that included greater fiscal austerity, such as the Fiscal Responsibility Law, signed in 2000, forcing municipalities, states and the federal government to comply with it. We have also seen a progression in the creation of elements that allow the development of capital markets in Brazil “.

According to Mauro, in Brazil there was a clear crowding out effect in the economy when the government was paying a 15% annually. Investors stopped investing in the private sector because they incurred in greater risk for a not-so-great spread. “Thanks to the fact that inflation levels were controlled, the Central Bank of Brazil was able to lower its Selic rate. This was the prerequisite for many investors to begun to see other opportunities. The data from the National Superintendency of Complementary Social Security (PREVIC) indicates that only a 0.2% of the assets in the pension plans are invested in foreign assets and the reason is precisely the high interest rates that the government was paying up to a couple of years. Now the pension funds should start looking for new opportunities, which can be in foreign investment in stocks or bonds or investment in local shares and corporate bonds, subject to credit risk, creating the need for more investment instruments to be available to investors. Companies can now seek financing in a range slightly above 6.75% of the Selic rate for those projects that were forgotten in the drawer and can now be profitable. While investors can now look for opportunities in the private corporate sector “

Having taken control of inflation and lowered the level of interest rates, there is a need for the government to implement the pension reform to reduce the current fiscal deficit. “The current pension system causes a fiscal deficit that is not sustainable over time. Either the next Brazilian government becomes aware of this reality or the rating agencies will not revise upwards their forecasts on Brazil. The international investors will choose other countries in the region to invest, such as Peru, Colombia, Mexico or Argentina.”

The presence of the CFA Institute in Brazil

One of the issues on which the CFA Institute focuses is on increasing the qualification standards of investment professionals. This is accomplished through university associations, scholarships, global competitions in the field of economic research -CFA Research Challenge- and of course, through the CFA Program, a rigorous program of three annual exams, for which the CFA Society of Brazil has launched the first edition of a preparation course in Sao Paulo.

“We still have many professionals to be trained in the market and the CFA Program is very well recognized worldwide. Brazilians like the challenge of preparing it, of seeking excellence. It is very hard, but it offers a high reward for our members, who can opt for better job opportunities when they are CFA Charterholders. In addition, it is a global passport that is recognized throughout the world.”

To contribute to the advancement of professional excellence, there are services that promote activities that help members find opportunities in the workplace, with a job board both locally and globally with the CFA Institute. “Many companies seek CFA Charterholders when they are looking to hire someone, it is a guarantee that that person is well qualified and completed a rigorous financial curriculum and also gained experience before joining their firms.”

Also, the establishment of standards and ethics in the profession is probably one of the most important areas for the CFA Institute and local societies. “Especially in Brazil and in the Latin American region, after everything that has happened in recent years, we believe it is very important. As well as having integrity in the markets, an area that we will continue to defend from now on, we have certain goals and standards that we would like asset managers and banks to take as theirs to increase their commitment to the industry.”

Another important area they focus on is the development of financial markets. To this end, they encourage debate among industry members, publishing recommendations on policies and procedures, as well as research studies on equity markets, fixed income and pension plans. “Last year we launched the first monograph contest on financial innovation. We had a total of 21 participants who managed to publish their research papers, with a similar approach to the monograph awards made by the Central Bank of Brazil. Considering the success obtained, we repeat again this year, “said Mauro Miranda.

Relations with regulatory bodies are too an important point for the CFA Society Brazil, which has strengthened its advocacy area, expanding the dialogue with the Securities Commission of Brazil (CVM) and the National Superintendence of Complementary Social Security (PREVIC) to obtain the recognition of the CFA Charter as necessary accreditation for the performance of certain functions in the financial markets. “Our voice has a greater relevance in the markets in terms of influencing the new regulations, but always having the investor’s interest in mind, always from an ethical and transparent perspective. We have sent our comments to the CVM, basically when there has been a public consultation, about 4 or 5 per year, and that is how we maintain the course of our relationship and communicate the opinions of our members and participants in our working groups.”

Finally, Mauro Miranda stressed that the CFA Institute’s commitment to Brazil is unwavering, its investment in the country has been very strong and will continue to be in the future. “This affects the members and our work with regulators in improving capital markets. We sell ideas and ideals and talk about best practices in the markets. CFA Institute is present in Brazil to add resources.”

GFG CAPITAL: A Value Proposition to Channel Change from Private Banking to Family Offices

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The story of the Gruener brothers, Eduardo and Mauricio, is the story of a family establishing a multi-family office in Miami in July 2003. Like most of their clients, they are from Mexico, and both wished to treat their clients as they themselves would like to be served by a wealth management firm. “One family at a time, that’s how I can summarize the culture of the group. We see the client as an extension of our own family, and that’s how we also consider the professionals who work with us,” explains Eduardo Gruener.

GFG Capital started almost 15 years ago. Mauricio was then working for Credit Suisse, in its wealth management division, after having worked for Republic National Bank of New York and for Lehman Brothers. Eduardo’s curriculum is equally outstanding, but in his case always in the area of investment banking; first in Bankers Trust, and later in Deutsche Bank.

When they decided to launch GFG Capital, their combined knowledge was perfectly complementary. “Between the two of us, we covered two important parts of banking, private banking and investment banking, and we decided that we wanted to start this business together, with the philosophy of sitting on the same side of the table as our clients and eliminating the conflicts of interest inherent to private banking. From the beginning, we knew that we wanted to launch a wealth management area and an investment banking area. Real Estate, our third area of expertise, came later. These three divisions make up the group today, although we started with the multi-family office, GFG Capital,” says Eduardo.

The firm now has another office in San Diego, California, from where they serve both international and domestic clients. “We are a dynamic team of 18 people, within a very family-like environment. We manage close to 900 million dollars for our family office clients. We are registered with the SEC. I would say that 60% of our clients are families in Latin America and 40% are US residents.”

Eduardo tells us that the profile of their main clients is that of self-made entrepreneurs. “They are families that started businesses, which have done very well and grew up with us. Part of the organic growth of the group is because we serve many families of this type. Obviously we also have other types of clients, such as second generations, but I would say that our ‘core’ is this. The highest percentage of our families is Mexican, followed by families from the US and Colombia, in that order.”

Witnesses to industry changes

“14 or 15 years ago this business was not as we know it today. We started with the wealth management division and, especially in the Latin American part, we noticed that when we talked to people about what a multi-family office is, it was a very little known concept. Families, even the largest ones, operated at that time with private banking and when we told them why it was important to have a family office with their own interests and capable of designing a global and coordinated strategy, it was difficult for them to understand it”, recalls Mauricio.

Perhaps the key to the whole issue was explaining that diversification was not about opening different private banking accounts in different banks, but based on analyzing the portfolio in a global way, he explains.

From private banking to family office

“At the end of the day, the bank earned money from the product it sold, but we apply a ‘fee’ for the assets managed and for designing a strategy aligned with the objectives of the entire family and with its risk tolerance. We eradicate the source of conflict of interests that private banking has. Fifteen years ago, this that is now so common was actually a very innovative concept. This was an important part of the group’s success. At present, the large families of Latin America attend to their financial needs with a multi-family office and I would say that, in fact, many do not even have a private bank anymore. This has been one of the most radical changes in the industry in the last decade.”

It‘s true that it didn’t happen overnight, it was a gradual transformation, he clarifies. “Things in our countries are a little slower than in other markets,” laughs Eduardo; adding later, in a more serious note: “At the end of the day, what counts is the model of multifamily office that we have and the benefits that we can offer”.

He also explains the benefits that this structure adds. “The feedback we receive from our clients is that the possibility of managing multiple custodians is a very interesting value-added service. When you are with a private bank it’s that one bank and that’s it. But from GFG Capital, we help our families to manage and supervise all their relationships, either in one or in many banks,” says the youngest of the Grueners.

“Our investment philosophy is active and most of the work is done through asset managers, but at the same time there are certain strategies where there is not as much possibility of generating alpha, where we use ETFs. However, for us it is more of a product to complement the portfolio”, he adds when talking about the investment instruments they use in their day-to-day.

Client profile in Mexico

When asked about what their Mexican families are asking for, both brothers agree that this type of client is becoming more and more sophisticated. The proximity to the United States and the high exposure to international markets are making the market less local and more global.

“The Mexican client is increasingly more like the American in terms of the type of strategies he seeks in order to manage his assets and the type of products he wants to access. We must also bear in mind that the Mexican market has grown a lot, it’s a market with very high liquidity, and the number of issuers in its stock markets has increased exponentially. At present, the Mexican family, or Mexican wealth, feels very comfortable in local markets, but it delves a lot into international markets. This segment is where GFG Capital has more second generations.”

Eduardo firmly states that what this type of client asks for is “to interact with people as little as possible”, to be able to consult by themselves the movements, performance, the portfolio’s risk statistics, previous operations, or the duration of the fixed income, for example.

“This level of transparency and accessibility is one of the things that differentiate us significantly. We have invested a lot in technology. We have just launched an interactive platform for mobile, web and tablet, which allows the client to get into their profile and manage the information. Having the information when they want it is something that is very important for millennials.”

He adds: “Since in other areas of the business we also do investment banking and a lot of real estate, this is a perfect complement to the family office and allows us to really give global solutions where we attend to everything that has to do with your finances. This is much more comfortable than having to rely on many different providers.”

Families who migrate to the United States

Another area of knowledge of the GFG Capital team concerns migration to the US and the previous steps a family can take to leverage some tax advantages. “We advise on how to manage your pre and post-transfer investments, always in the good hands of a tax-consultancy office,” they explain.

“What these families must know when they migrate to the United States,” Mauricio explains, “is that regardless of their immigration status, whatever the type of visa, or even if they don’t come with any, several things can be done to prepare their assets for the moment they become US residents for tax purposes.”

The example he provides is the creation of a trust to avoid inheritance tax. “If we deposit the family’s capital in a trust where the beneficiaries of that money are the next generation, the inheritance tax is eliminated. It is a way to generate a lot of fiscal efficiency. But you have to do it before you arrive. The planning and execution of a scheme of these characteristics has to go hand-in-hand with the financial part. That’s the part we play.”

Trump’s tax reform

Obviously, in this regard, Trump’s tax reform is going to create many changes in the US. The Gruener brothers agree in that, while in principle this reform will only affect families in the US, there are channels for foreigners with investments, which is something that generates revenue for the country, to benefit.

If you’re a foreign owner of rental property in the US, you must pay 35% tax on ‘ordinary income’ and from 15% to 20% on ‘capital gains’. With the tax reform, if the ‘corporate tax’ is reduced to 20%, many of these families could channel their investments through companies and reduce their income tax to 20% rather than 35%. As we see it, tax reform will not only encourage companies in the US to be more competitive, but will also attract foreign investment,” concludes Eduardo.

Arcano: “Without Retrocession, the Absence of Conflict of Interest and Independence is Guaranteed, Something that Does Not Generally Happen in Private Banking”

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Arcano: “Sin retrocesiones se garantiza la ausencia de conflicto de interés y la independencia, algo que no ocurre de forma generalizada en las bancas privadas”
Wikimedia CommonsÍñigo Susaeta, courtesy photo. Arcano: "Without Retrocession, the Absence of Conflict of Interest and Independence is Guaranteed, Something that Does Not Generally Happen in Private Banking"

The market environment is still favorable but we will have to be cautious with the policies of the central banks. For 2018, Íñigo Susaeta, Managing Partner of Arcano Family Office, favors short-term assets such as floating loans, emerging local currency fixed income, inflation-linked assets and different alternative funds that can look for opportunities without depending on the directionality of the markets. In this interview with Funds Society, in addition to talking about markets, Susaeta explains the impact that MiFID II will have; it will change the distribution landscape in Spain and will promote services such as independent advice –which they offer- and the discretionary management of portfolios.

Under MiFID II, financial advice in Spain could adopt a new face. What are the main changes that the regulations will bring to the industry? Will there be a revolution in the advisory business in Spain?

MIFID II will undoubtedly lead to a change in the business of many advisors in Spain, and in Arcano’s case, and specifically in its Family Office service, it is a slap on the back for our model with which we have been leading the market for a decade and where we have always opted, as one of our differential factors, for independence and for receiving payments exclusively from our clients.

In general terms, MIFID II aims to strengthen investors’ protection and to improve the functioning of financial markets through greater transparency of prices, competition and market efficiency. Thus, for example, banks will find it more difficult to collect incentives for the sale of funds and they will have to increase the amount of funds from other management companies which they offer their clients, which is causing a change in the distribution model.

How have you prepared for the regulations? What kind of advice does Arcano offer, both from the EAFI and the family office?

In Arcano we offer independent advice. In fact, we were pioneers in incorporating this model in Spain more than a decade ago. Thus, we adapt the best practices of international multifamily offices to our firm, and time has proved us right, becoming one of the market leaders in Spain, advising over 20 HNW holdings with a combined volume exceeding 1.4 billion Euros In this regard, the adoption of MIFID II has only reinforced our model.

There is a major issue in MIFID II that I would like to point out: the collection of retrocession fees. since its foundation, Arcano has considered the non-collection of third party retrocessions in the provision of its services to clients as a fundamental aspect for the development of its Wealth Advisory services. It is our company’s philosophy, and we believe that the absence of conflict of interest and independence is guaranteed in this way, something that we think does not generally happen in private banking.

Will MIFID II provide an impulse to discretionary portfolio management, or to advisory activities?

We believe that to both, and it is an area that Arcano is already developing through its IICs manager. In fact, if we look at the implicit costs that banks apply to some of their services, many clients will opt for other alternatives, giving an impulse to both discretionary management and independent advice.”

What growth rates has the family office shown in recent years and what objectives do you set for the next ones?

As I pointed out, Arcano has become one of the market leaders in Spain with over 20 families or HNW holdings with a total volume of more than 1.4 billion Euros. Our goal is to continue to have the trust of those great holdings, which increasingly need value and quality services, with a 360-degree approach like the one we offer at Arcano, which is completely independent and customized.

Your portfolio construction model already holds a 10 year track record… what are its key factors and how has it evolved?

It is a very different risk-based asset allocation model, based on principles applied by some large institutional investors such as Bridgewater or the sovereign fund of Norway, among others. It seeks greater robustness in the different market scenarios by distributing the total risk of the portfolio into four factors: inflation, interest rates, credit and growth.

We believe that the real diversification it offers will be fundamental in the most uncertain and volatile environment that we will live through in the medium term. Even in the most stable context of the last seven years, if we look at the profitability obtained by the sicav managing entities that manage over 100 million Euros, Arcano would be the second in the ranking with an annualized return of 4.4% in its moderate profile portfolio.

As well, your group has provided room for alternative management … is including these vehicles in the portfolios now a key factor?

In a market context such as the current one, with low interest rates, it makes more sense than ever to have part of the portfolio in alternative assets, including illiquid ones such as private equity or real estate funds, among others. However, it is important to have a global vision of the assets and their objectives and assess which weight is the most appropriate to include these assets in the portfolio, as well as selecting the best managers and products.

In Arcano’s case, however, it should be remembered that the advisory activity of large holdings is completely separate from the management activity of our management company’s alternative products.

Looking ahead to this year, do you expect more volatility? What assets do you favor?

The stock market cycle which began in 2009 is the second longest in history, which invites to proceed with a certain amount of prudence, also taking into account that central banks will jointly begin to withdraw liquidity from the markets by the end of this year. A rally in real rates faster or deeper than expected could lead to a repricing of risk assets. In this market moment, we favor short-term assets such as floating loans, emerging local currency fixed income, inflation-linked assets and different alternative funds that can seek opportunities without depending on the directionality of the markets.

Why has the Goldman Sachs Corporate Trading Desk Just Gone Through the Busiest Two Weeks of its History?

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¿Por qué la mesa de operaciones corporativas de Goldman Sachs acaba de atravesar las dos semanas más ocupadas de su historia?
CC-BY-SA-2.0, FlickrPhoto: Neil Kearns, Head of the Corporate Operations Department of the Securities Division at Goldman Sachs. Why has the Goldman Sachs Corporate Trading Desk Just Gone Through the Busiest Two Weeks of its History?

In the midst of market volatility, companies have been increasing their stock repurchase programs, providing unprecedented support for investors. Neil Kearns, Head of the Corporate Operations department of the Securities Division at Goldman Sachs, explains in an interview why 2018 is about to set a new share repurchase record.

Your department helps companies authorize and execute stock repurchase programs, what kind of activity are you seeing at your trading desk?

In the first two weeks of February, we recorded the most active period in the history of our trading desk, with executions (theoretical dollars spent) that increased 4.5 times our 2017 average. Authorizations to repurchase shares have increased by 100 % during the same period. To put this in perspective, it is the fastest start to the year in terms of repurchase authorizations. In fact, this indicates that we are likely to see the highest level of share buyback activity during 2018.

What are the factors that drive activity?

Certainly, the US tax reform and the corporate repatriation of cash that companies have outside the country are significant catalysts. When we analyze the last period of tax exemptions in 2004, for example, we see that the execution of repurchases of the S & P 500 increased by 84% that year and by 58% the next.

Companies are also operating in a business climate that has improved. The economy is strengthening, corporate profits are growing and companies are generating more free cash flow. In addition, any company that is not actively allocating its cash faces the wrath of shareholders who are dissatisfied with the management of capital and the possible unwanted attention of activists.

What other parts of the market will affect the repurchase of shares?

The share repurchase activity is highly correlated with the general volatility of the market, which is why many companies used the market correction of last month as an opportunity to gain an advantage over their repurchase targets for the year. In fact, our colleagues at Goldman Sachs Research recently raised their estimates for total cash spending of the S&P 500 in 2018 to $ 2.5 trillion, with a 23% increase in share repurchases, up to 650 billion dollars, due to the tax reform and the recent market correction.

What are the implications for investors and for the market?

Buy-side investors are very focused on what companies are doing in the market, particularly in response to stock volatility. Given that companies have been the largest net buyers of US stock since 2010, there is obviously a great interest in understanding their general sentiment in light of market fluctuations and commitment to their repurchase plans.

For example, since the 2008 financial crisis, the S&P 500 companies have repurchased about 4.25 trillion dollars of their own shares, which represents approximately 17% of the current market capitalization, situated at approximately $ 24.5 trillion.

Undoubtedly, we see greater interest in corporate behavior with respect to its repurchase programs when the markets are highly volatile. Based on both the pace of repurchase announcements and the actual repurchase activity, investors can take comfort in the fact that stock repurchase programs are very much alive.

Vanguard Lists Three UCITS ETFs in Mexico

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Vanguard lista tres ETFs UCITS en la bolsa de México
Wikimedia CommonsBMV. Vanguard Lists Three UCITS ETFs in Mexico

Vanguard has listed three new UCITS ETFs on the Mexican market. Currently there are 68 Vanguard ETFs in the Mexican Global Market, known as SIC.

The new ETFs, with fees of 0.09%, 0.19%, and 0.29%, are:

  •     Vanguard FTSE 100 UCITS ETF – it looks to replicate the returns of the UK market
  •     Vanguard FTSE Japan UCITS ETF – it is focused on tracking the returns of medium-to-large cap Japanese firms
  •     Vanguard FTSE-All Word High Dividend Yield – it tracks the returns generated by the index of medium-to-large cap emerging and developed market companies that pay high dividends

Juan Hernández, Vanguard Mexico Country Head, said: ‘We are pleased to list our Ucits ETFs on the Mexican Stock Exchange, offering Mexican investors additional opportunities to create a balanced portfolio that meets their investment goals. We are committed to providing durable and effective solutions to Mexican investors, helping them achieve success in their investments.’

The ETFs grant exposure specific international themes that are not offered among its current US-domiciled ETF range. According to the firm, the UK and Japan ETFs offer exposure to two of the world’s most developed countries while the High Dividend Yield ETF combines a diversified stock portfolio with high income, at a competitive price.

Franklin Templeton Opens New Office in Santiago, Chile

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Franklin Templeton abre nueva oficina en Chile y nombra a Gonzalo Ramírez Correa vicepresident Sales
Santiago de Chile. Franklin Templeton Opens New Office in Santiago, Chile

Franklin Templeton Investments announced the opening of a new office in Santiago, Chile, to support the sales and client service needs in the country. The firm has also appointed Gonzalo Ramírez Correa as vice president, Sales. Based in the firm’s new Santiago office, he will work to develop tailored solutions for clients in Chile, leveraging the capabilities of Franklin Templeton’s various investment groups. He will report to Sergio Guerrien, director and country manager for South America ex-Brazil, who will oversee the Chile operation.

“We are very delighted that Gonzalo has joined our team in this period of growth in the Chilean market,” said Guerrien. “With the opening of this new office in Santiago, we are committed to strengthening our capabilities in the South American region as our clients look to us to solve their needs for specific investment outcomes while leveraging the comprehensive resources and broad expertise of Franklin Templeton.”

Ramírez Correa brings with him over 10 years of industry experience. Prior to joining Franklin Templeton, he was director of business development for Legg Mason Global Asset Management, focused on sales and based in Santiago. Before joining Legg Mason in 2015, he was an account manager and investment sales specialist for Latin America for Thomson Reuters. Earlier in his career, Ramírez Correa was with HMC Capital in institutional sales, where he was responsible for business relationships.

Franklin Templeton has been serving a wide array of local institutional investors, pension funds, private banks, retail distributors, mutual funds, insurance companies and family offices in Chile since 1995 and is among the top mutual fund providers to the Chilean pension system.

Franklin Templeton has been present in Latin America for over 20 years. The company opened its first office in the region in 1995, and today has a presence in Santiago, Buenos Aires, Bogota, Sao Paulo, Rio de Janeiro, Montevideo and Mexico City.

The New Law Against Money Laundering in Uruguay will Jeopardize the Offshore Industry

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La nueva ley contra el lavado de activos en Uruguay pondrá en jaque a la industria offshore
Marcelo Gutiérrez, Managing Partner for Invertax / Courtesy Photo. The New Law Against Money Laundering in Uruguay will Jeopardize the Offshore Industry

Uruguay has started the year with a new law against money laundering, a regulation that brings together all the provisions that were previously dispersed in different legal instruments. The reform places the country within international standards, in a global context of ever stricter regulations.

According to the new law, approved towards the end of 2017, tax offenses are considered predicate offences to money laundering, which entails a criminal process. Lawyers and accountants must report suspicious transactions, as well as banks, financial advisors, real estate agents, auctioneers, civil associations, casinos, foundations, political parties and NGOs.

After only a few months trajectory, the reform still raises a series of questions and doubts on the part of the taxpayers. What changes is this regulation generating in the Uruguayan financial industry? “The Uruguayan financial industry acquires the new requirement of ‘know your client’. From now on, tax compliance is mandatory,” explains Marcelo Gutiérrez, Managing Partner for Invertax.

“This change is not only occurring in Uruguay, but in many other countries, and is part of the new reality: more transparency, more information exchange. It was under discussion for a long time, but tax evasion is very difficult to support as a moral argument. The discussion on whether governments make good use or misuse of these resources is a different matter,” adds the expert on tax issues.

At Invertax they believe that the Uruguayan financial industry will encounter some difficulties: “As in the rest of the world, and with the end of banking secrecy, the offshore industry in Uruguay is on its way out. At present, only the United States offers traditional offshore services,” says Gutiérrez, Uruguay’s representative at the International Fiscal Association.

The new restrictions raise fears of a decrease in foreign investment, something that Marcelo Gutiérrez plays down: “It depends on what type of investment we are talking about, if we refer to Real Estate in Punta del Este, this new requirement will complicate things for many of the ’traditional’ investors. However, direct foreign investment, such as the pulp mills and other important ones already planned, will not be affected.”