Crime, Corruption, Tax Evasion Drained a Record US$991.2bn in Illicit Financial Flows from Developing Economies in 2012

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A record US$991.2 billion in illicit capital flowed out of developing and emerging economies in 2012—facilitating crime, corruption, and tax evasion—according to the latest study released Tuesday by Global Financial Integrity (GFI), a Washington, DC-based research and advisory organization. The study is the first GFI analysis to include estimates of illicit financial flows for 2012.

The report—GFI’s 2014 annual global update on illicit financial flows—pegs cumulative illicit outflows from developing economies at US$6.6 trillion between 2003 and 2012, the latest year for which data is available.  Titled “Illicit Financial Flows from Developing Countries: 2003-2012,” [PDF] the report finds that illicit outflows are growing at an inflation-adjusted 9.4 percent per year—roughly double global GDP growth over the same period.

“As this report demonstrates, illicit financial flows are the most damaging economic problem plaguing the world’s developing and emerging economies,” said GFI President Raymond Baker, a longtime authority on financial crime. “These outflows—already greater than the combined sum of all FDI and ODA flowing into these countries—are sapping roughly a trillion dollars per year from the world’s poor and middle-income economies.”

“Most troubling, however, is the fact that these outflows are growing at an alarming rate of 9.4 percent per year—twice as fast as global GDP,” continued Mr. Baker.  “It is simply impossible to achieve sustainable global development unless world leaders agree to address this issue head-on. That’s why it is essential for the United Nations to include a specific target next year to halve all trade-related illicit flows by 2030 as part of post-2015 Sustainable Development Agenda.”

Findings

Authored by GFI Chief Economist Dev Kar and GFI Junior Economist Joseph Spanjers, the study reveals that illicit financial flows hit an historic high of US$991.2 billion in 2012—marking a dramatic increase from 2003, when illicit outflows totaled a mere US$297.4 billion. Over the span of the decade, the report finds that illicit financial flows are growing at an inflation-adjusted average rate of 9.4 percent per year. Still, in many parts of the world, the authors note that illicit flows are growing much faster—particularly in the Middle East and North Africa (MENA) and in Sub-Saharan Africa, where illicit flows are growing at an average annual inflation-adjusted rate of 24.2 and 13.2 percent, respectively.

Totaling US$6.6 trillion over the entire decade, illicit financial flows averaged a staggering 3.9 percent of the developing world’s GDP. As a share of its economy, Sub-Saharan Africa suffered the largest illicit financial outflows—averaging 5.5 percent of its GDP—followed by developing Europe (4.4 percent), Asia (3.7 percent), MENA (3.7 percent), and the Western Hemisphere (3.3 percent).

“It’s extremely troubling to note just how fast illicit flows are growing,” stated Dr. Kar, the principal author of the study.  “Over the past decade, illicit outflows from developing countries increased by 9.4 percent each year in real terms, significantly outpacing economic growth.  Moreover, these outflows are growing fastest in and taking the largest toll—as a share of GDP—on some of the poorest regions of the world.  These findings underscore the urgency with which policymakers should address illicit financial flows”.

Trade Misinvoicing Dominant Channel

The fraudulent misinvoicing of trade transactions was revealed to be the largest component of illicit financial flows from developing countries, accounting for 77.8 percent of all illicit flows—highlighting that any effort to significantly curtail illicit financial flows must address trade misinvoicing.

The US$991.2 billion that flowed illicitly out of developing countries in 2012 was greater than the combined total of foreign direct investment (FDI) and net official development assistance (ODA), which these economies received that year. Illicit outflows were roughly 1.3 times the US$789.4 billion in total FDI, and they were 11.1 times the US$89.7 billion in ODA that these economies received in 2012.

“Illicit financial flows have major consequences for developing economies,” explained Mr. Spanjers, the report’s co-author.  “Emerging and developing countries hemorrhaged a trillion dollars from their economies in 2012 that could have been invested in local businesses, healthcare, education, or infrastructure.  This is a trillion dollars that could have contributed to inclusive economic growth, legitimate private-sector job creation, and sound public budgets. Without concrete action addressing illicit outflows, the drain on the developing world is only going to grow larger.”

Country Rankings

Dr. Kar and Mr. Spanjers’ research tracks the amount of illegal capital flowing out of 151 different developing and emerging countries over the 10-year period from 2003 through 2012, and it ranks the countries by the volume of illicit outflows. According to the report, the 25 biggest exporters of illicit financial flows over the decade are:

  1. China……… US$125.24bn average (US$1.25tr cumulative)
  2. Russia…………….. US$97.39bn avg. (US$973.86bn cum.)
  3. Mexico…………….. US$51.43bn avg. (US$514.26bn cum.)
  4. India……………….. US$43.96bn avg. (US$439.59bn cum.)
  5. Malaysia…………. US$39.49bn avg. (US$394.87bn cum.)
  6. Saudi Arabia……. US$30.86bn avg. (US$308.62bn cum.)
  7. Brazil……………… US$21.71bn avg. (US$217.10bn cum.)
  8. Indonesia……….. US$18.78bn avg. (US$187.84bn cum.)
  9. Thailand…………. US$17.17bn avg. (US$171.68bn cum.)
  10. Nigeria…………… US$15.75bn avg. (US$157.46bn cum.)
  11. A.E………………… US$13.53bn avg. (US$135.30bn cum.)
  12. South Africa……… US$12.21bn avg. (US$122.14bn cum.)
  13. Iraq…………………. US$11.14bn avg. (US$89.10bn cum.)
  14. Costa Rica………… US$9.40bn avg. (US$94.03bn cum.)
  15. Philippines……….. US$9.35bn avg. (US$93.49bn cum.)
  16. Belarus……………. US$8.45bn avg. (US$84.53bn cum.)
  17. Poland……………… US$5.31bn avg. (US$53.12bn cum.)
  18. Panama…………… US$4.85bn avg. (US$48.48bn cum.)
  19. Serbia……………… US$4.57bn avg. (US$45.66bn cum.)
  20. Chile……………….. US$4.56bn avg. (US$45.64bn cum.)
  21. Brunei…………….. US$4.30bn avg. (US$34.40bn cum.)
  22. Syria………………. US$3.77bn avg. (US$37.68bn cum.)
  23. Egypt……………… US$3.77bn avg. (US$37.68bn cum.)
  24. Paraguay………… US$3.70bn avg. (US$36.97bn cum.)
  25. Venezuela……….. US$3.68bn avg. (US$36.77bn cum.)

For a complete ranking of average annual illicit financial outflows by country, please refer to Appendix Table 2 of the report on page 28. The rankings can also be downloaded here.

GFI also found that the top exporters of illegal capital in 2012 were:

  1. China………………………… US$249.57bn
  2. Russia……………………….. US$122.86bn
  3. India…………………………… US$94.76bn
  4. Mexico……………………….. US$59.66bn
  5. Malaysia ………………….. US$48.93bn
  6. Saudi Arabia……………….. US$46.53bn
  7. Thailand…………………….. US$35.56bn
  8. Brazil…………………………. US$33.93bn
  9. South Africa………………… US$29.13bn
  10. Costa Rica…………………… US$21.55bn
  11. Indonesia……………………. US$20.82bn
  12. A.E…………………………… US$19.40bn
  13. Iraq…………………………… US$14.65bn
  14. Belarus…………………….. US$13.90bn
  15. Philippines…………………. US$9.16bn
  16. Syria…………………………… US$8.64bn
  17. Nigeria……………………….. US$7.92bn
  18. Trinidad & Tobago…………. US$7.41bn
  19. Vietnam……………………… US$6.93bn
  20. Lithuania………………….. US$6.45bn
  21. Libya…………………………. US$5.40bn
  22. Panama……………………. US$5.34bn
  23. Aruba………………………. US$5.29bn
  24. Egypt………………………. US$5.09bn
  25. Chile……………………….. US$5.08bn

An alphabetical listing of illicit financial outflows is available by year for each country in Appendix Table 3 on pg. 30 of the report, or it can be downloaded here.

Policy Recommendations

The report recommends that world leaders focus on curbing the opacity in the global financial system, which facilitates these outflows. Specifically, GFI maintains that:

  • Governments should establish public registries of meaningful beneficial ownership information on all legal entities;
  • Financial regulators should require that all banks in their country know the true beneficial owner(s) of any account opened in their financial institution;
  • Government authorities should adopt and fully implement all of the Financial Action Task Force’s (FATF) anti-money laundering recommendations;
  • Regulators and law enforcement authorities should ensure that all of the anti-money laundering regulations, which are already on the books, are strongly enforced;
  • Policymakers should require multinational companies to publicly disclose their revenues, profits, losses, sales, taxes paid, subsidiaries, and staff levels on a country-by-country basis;
  • All countries should actively participate in the worldwide movement towards the automatic exchange of tax information as endorsed by the OECD and the G20;
  • Trade transactions involving tax haven jurisdictions should be treated with the highest level of scrutiny by customs, tax, and law enforcement officials;
  • Governments should significantly boost their customs enforcement, by equipping and training officers to better detect intentional misinvoicing of trade transactions; and
  • The United Nations should adopt a clear and concise Sustainable Development Goal (SDG) to halve trade-related illicit financial flows by 2030and similar language should be included in the outcome document of the Financing for Development Conference in July 2015.

RIA and Dually Registered Assets Will Reach 28% Marketshare By 2018

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RIA and Dually Registered Assets Will Reach 28% Marketshare By 2018
Foto: Armada Española. Los activos de los RIAs alcanzarán el 28% de la cuota de mercado en EE.UU. en 2018

New research from global analytics firm Cerulli Associates predicts registered investment advisor (RIA) and dually registered advisor assets will reach 28% marketshare by year-end 2018.

“As of year-end 2013, the RIA and dually registered segment account for 20% of total intermediated retail investor assets, and we expect that number to reach 28% by 2018,” states Kenton Shirk, associate director at Cerulli.

“The asset marketshare of the RIA channel exceeds headcount marketshare, reinforcing the fact that RIA advisors manage more assets than advisors outside of the channel, on average,” Shirk explains. “When you combine this data with our projected growth of the channel, it would seem that the RIA channel would be a high priority for asset managers. However, the channel presents unique challenges for product providers, which can reduce the appeal.”

Cerulli’s latest report, RIA Marketplace 2014: Growth Drivers in an Accelerating Industry Segment, examines the unique dynamics of the RIA channel. This report provides insight about RIAs for providers and asset managers serving these advisors. 

“Ongoing growth of RIA practices with more than $1 billion in assets has occurred, and while these practices are certainly attractive on a standalone basis, they become less so when compared to wirehouse branch offices, which represent equal or larger opportunities,” Shirk continues. “The reality is that strategic partnerships with large broker/dealers ensure branch office access and consideration for inclusion in the portfolios recommended by home-office teams, which can result in millions of dollars of flows based on a single decision.”

Cerulli cautions that while the RIA and dually registered segments represent a flourishing distribution opportunity, product providers must make every effort to ensure they are creating an efficient and sustainable process to address this dispersed market.

Affluent Boomers are “Terrified” of Health Care Costs and Many Feel They Will Never Retire

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More than 62 percent of pre-retirees now say they are “terrified” of what health care costs may do to their retirement plans, according to an annual Nationwide Retirement Institute survey. The survey reveals concern about out-of-control health care costs and the Affordable Care Act (ACA) increasing those costs.

According to the online survey conducted from Oct. 6 – 14, 2014, by Harris Poll of 801 Americans age 50 or older with at least $150,000 in household income (“affluent boomers”), 72 percent say one of their top fears in retirement is their health care costs going out of control. More than half (55 percent) believe the ACA will increase those costs and more than one-quarter of employed affluent boomers (26 percent) now believe they will never retire.

“Even America’s affluent workers don’t know how they will fund their health care costs in retirement and they don’t expect ObamaCare will help them,” said John Carter, president of Nationwide’s retirement plans business, which provides defined contribution and defined benefit plans to more than two million participants, representing nearly $100 billion in assets under management. “The attention the ACA has received in the past year has increased awareness of health care costs in retirement. We think that’s a step in the right direction, and what Americans need now is a plan to adequately prepare for those costs. It is possible. However instead of making a plan, too often the ‘plan’ is to just continue working.”

The attention the ACA has received in the past year has increased the percent of pre-retirees who feel very confident to confident that they know their personal benefits and consequences of the ACA (32 percent vs. 24 percent). Yet, pre-retirees are also more likely than last year to say they expect their biggest expense in retirement to be the cost of health care (51 percent vs. 43 percent).

Many Americans like aspects of the ACA, such as guaranteed coverage and access to multiple insurers. However, most affluent boomers (64 percent) believe the ACA will be a significant drain on the U.S. economy and will do more harm than good to their employer (63 percent). More than two in five affluent boomers (45 percent) say they would delay their retirement if they had to buy their own health insurance. Over one-quarter of parents (27 percent) say they would delay their retirement in order to keep their children on their employer-based health insurance plan.

Understanding Medicare

Over three in five affluent pre-retirees (61 percent) wish they understood Medicare coverage better, and 73 percent of those who discussed their retirement plans with a financial advisor say it is important or very important their financial advisor discusses health care costs during retirement with them when planning for retirement. Nearly two-thirds of affluent pre-retirees enrolled in Medicare did not know that Medicare does not cover long-term care costs.

Solutions available

However, 77 percent say they have not discussed their health care costs during retirement with a professional financial advisor. Of those who have talked with an advisor, three-quarters (75 percent) discussed health care costs in retirement not covered by Medicare.

To help simplify this complicated issue and encourage these discussions, Nationwide’s Personalized Health Care Assessment uses proprietary health risk analysis and up-to-date actuarial cost data such as personal health and lifestyle information, health care costs, and medical coverage to provide a meaningful, personalized cost estimate that will help clients plan for medical expenses. For those under 65, it bases its calculations on the average cost of a Silver Plan in the Affordable Care Act exchanges in their state.

“It’s much easier for advisors to have these difficult conversations when they can use a tool to provide a fact-based cost estimate based on their clients’ health risk and lifestyle,” said Kevin McGarry, director of the Nationwide Retirement Institute. “They now can break down and simplify a complex topic to take clients from terrified to confident.”

Vontobel Asset Management Sharpens Positioning to Achieve Further Global Growth

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Vontobel separa la gestora del grupo, que pasará a funcionar como entidad jurídica independiente
Photo: Roland zh. Vontobel Asset Management Sharpens Positioning to Achieve Further Global Growth

Vontobel Asset Management – which is currently part of Bank Vontobel AG – will be run as an independent legal entity and a wholly-owned subsidiary of Vontobel Holding AG in future. This strategic realignment is intended to form the basis for further growth in the global asset management market.

The creation of an independent legal entity is in line with Vontobel Asset Management’s strategy of operating internationally. The independence of asset managers is assigned high importance in most asset management markets and is a key selection criterion applied by international consultants and clients. This realignment underscores the international growth strategy pursued by Vontobel Asset Management, and this efficient and modern organizational structure takes account of global competition, says Vontobel.

The new company will operate under the name ‘Vontobel Asset Management AG’. The transformation of the business unit into an independent legal entity is subject to the approval of the Swiss Financial Market Supervisory Authority FINMA and the General Meeting of Shareholders of Bank Vontobel AG on April 29th, 2015.

Opportunity International Partners with Credit Suisse to Expand Education Around the World

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Opportunity International, the premier global financial services organization for the poor, announced Credit Suisse will help support a new education initiative to improve the quality, availability and affordability of education in impoverished areas of Latin America, Africa and Asia.

“Investing in education is one of the most decisive ways to help people work their way out of poverty,” said Vicki Escarra, Global CEO of Opportunity International. “Research has shown that education raises a student’s future economic status and can even extend life expectancy. We look forward to continuing our important partnership with Credit Suisse to expand educational opportunities for thousands of youth through access to financial services.”

Building on a successful six-year partnership with Credit Suisse, this new three-year program will launch education finance initiatives in Colombia and Tanzania and expand existing programs in the Dominican Republic, Ghana, Kenya, Malawi, Rwanda, Uganda, India and the Philippines to help more than 530,000 children and youth through a combination of innovative savings, lending, insurance and financial education products and services. Specifically, the initiative will provide school improvement loans to help build and expand schools, hire and train teachers, provide lunches and help pay for other activities to increase the number of students in school and improve the quality of education they receive. The initiative will also provide school fee loans to help parents pay tuition and buy books and other school supplies to ensure their children stay in school regardless of family income fluctuations.

“More than 67 million children worldwide are not enrolled in schools, often because their family simply cannot afford the costs of school fees, tuition or supplies, or because quality education isn’t available where they live,” said Manuel Rybach, Global Head Corporate Citizenship and Foundations for Credit Suisse. “Credit Suisse and Opportunity International understand that investing in education is an investment in the future. That’s why we’ve partnered— to ensure that children around the world have opportunities to learn and grow.”

An estimated 7.1 million people have already benefited from the partnership between Opportunity International and Credit Suisse’s Microfinance Capacity Building Initiative through support of electronic-banking transactions, training for microfinance staff and financial services for people in impoverished areas. The new “Empowering Generational Change through Education” initiative aims to achieve the following goals:

  • Provide 2,200 school improvement loans to private school proprietors, impacting the access and quality of education for approximately 484,000 students.
  • Provide 52,000 school-fee loans to parents and students to help parents to pay tuition and fees, impacting the education of approximately 161,000 students.
  • Pilot and expand additional educational services to provide young people with a formal education and the skills they need to get a job. Services provided will include child savings accounts and youth financial education in Africa; and the EduSave program—an innovative, free insurance program to cover a child’s school costs in the event of a parent or guardian’s death or permanent disability.
  • Provide education finance bank staff with training and development opportunities to help them service Opportunity’s growing educational programs.

Private Equity Leads Way to Higher Alternative Assets Exposure

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Increased investor exposure to alternative assets is being led by private equity, with two in five Limited Partners (LPs) planning an increased target allocation to the asset class in the next twelve months, according to Coller Capital’s latest Global Private Equity Barometer. However, although one third of investors say they will also increase their allocation to real estate, the same proportion will reduce their allocation to hedge funds. (Separately, almost two thirds of LPs say they expect large private equity investors to review their hedge fund exposure in the wake of CalPERS’ decision to stop investing in the asset class.)

Still-strengthening return expectations explain private equity’s popularity with investors. Almost all (93% of) LPs are now forecasting annual net returns greater than 11% from their private equity portfolios over a 3-5 year horizon (up from 81% of LPs two years ago). A quarter of LPs are forecasting net returns of over 16%.

“In today’s low-yield world it’s hugely impressive to see such a high proportion of private equity investors expecting annual net returns of more than 11%,” said Jeremy Coller, CIO of Coller Capital, “and Limited Partners are telling us there is more to play for. They believe private equity returns could get even stronger with further enhancements to General Partners’ operational skills and more specialised funds.”

Areas of LP interest

Investors give several indications where they see attractive opportunities in this edition of the Barometer.

Emerging economies remain a strategic imperative – with 15-20% of LPs planning to begin or increase PE commitments to China, Hong Kong, Taiwan and South East Asia. Another popular region is Latin America, where one in seven LPs expect to begin or increase commitments. India is the area over which investors betray most uncertainty: the same proportion of LPs (8%) plan to increase and to reduce their commitments in the subcontinent.

LP backing for funds taking minority positions in private companies looks to remain strong. Half of investors are already committed to such funds, and an additional 13% of LPs said they are likely to seek this kind of exposure in the future. Investors will also be interested in GPs with strong buy-and-build credentials – two thirds of LPs believe buy-and-build investments will outperform other buyout investments in the next 3-5 years.

Private equity investment in ‘real assets’ is another increasingly popular area. Two thirds of LPs already have private equity exposure to energy-focused funds; half have private equity exposure to real estate; and between a quarter and a third of LPs have investments in funds focused on mining, shipping, timber and farmland. The Barometer shows that all these areas will attract new investors over the next three years.

Credit investment is another focus for investors – one third of LPs say they plan to scale up their exposure to credit over the next 12 months. Banks’ relatively weaker position in credit markets is illustrated by LPs’ views on future sources of debt funding for buyouts: just over a third of investors expect banks to take a bigger share of buyout debt in the next three years, compared with almost two thirds expecting a higher share for CLOs and high-yield bonds.

The Barometer confirms that the trend toward more direct investing by LPs (i.e., proprietary investments into private companies and co-investments alongside GPs) will continue. Approaching half (45%) of today’s LPs do no direct private equity investing or have less than a tenth of their exposure to ‘directs’, but only one in five LPs expects to be in the same position in five years’ time.

Gender diversity in private equity firms

The majority (88%) of private equity investors (most of whom are male) believe that a higher proportion of women in senior positions at GPs would have little direct impact on private equity returns. However, three in five LPs also believe that PE firms benefit more broadly from gender diversity. Around 70% of these investors say that greater gender diversity at senior levels results in better team quality and team dynamics in private equity firms; and around 40% see benefits to GPs’ governance, investor relations, and risk management.

DC pension funds

Attempts are currently being made to solve the problems associated with defined contribution (DC) pension plans investing in private equity. The Barometer shows that a large majority (88%) of Limited Partners expect these initiatives to succeed, and that DC plans will make private equity commitments over the next five years. However, most (70% of) investors believe DC pension schemes will remain a minor source of capital for the industry.

Additional Barometer findings

The Winter 2014-15 edition of the Barometer also charts investors’ views and opinions on:

  • The economic cycle and the risk of deflation in the eurozone
  • The PE exit environment
  • GPs’ use of debt
  • LP recruitment and pay scales
  • Venture capital and early-stage innovation
  • Chinese GPs’ ambitions
  • LP understanding of the industry post-crash
  • The effect of regulation on PE returns

Why are Americans so Pessimistic about the U.S. Economy?

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¿Por qué los americanos son tan pesimistas acerca de la economía de Estados Unidos?
Photo: Seattle Municipal Archives. Why are Americans so Pessimistic about the U.S. Economy?

Five years after the Great Financial Crisis (GFC), despite improvements in GDP growth and employment, the U.S. public still seems to be oppressed by a cloud of negative sentiment. A recent PewResearch Survey found that a majority of Americans still perceive the economic climate as poor or fair at best (83%), a level still far below pre-crisis sentiment. Mike Temple, portfolio manager of the Pioneer Dynamic Credit Fund, explains the reasons for this pessimism.

In the eyes of many, a freight train of seemingly unsolvable problems –cost and quality of education, income disparity and structural unemployment– is leading to an accelerating decline of the U.S. and a possible near-term repeat of the GFC that ravaged investor portfolios. “We don’t deny that many daunting challenges lie ahead. But dynamic, longer-term trends are opening up entirely new avenues of invention and industry, which could potentially usher in an era of stunning growth and prosperity. We are optimists and think it is time to step back from the fear and uncertainty that currently characterizes the public mood and explore these trends, their impact on the economy and their implications for investors”, said Temple.

The Root of The Problem: What Happened to the Jobs?

“We believe much of the pessimism is rooted in the challenges that the labor sector is facing. The chart below provides evidence that the rate of recovery in employment, in the last two recessions, has slowed dramatically, which has led to a national debate as to whether the rise in unemployment is structural (permanent) or merely cyclical”, affirm the portfolio manager.

Enlarge

The Federal Reserve believes that the U.S. unemployment story remains largely cyclical (translation: all we need is a robust recovery). Some distinguished voices suggest that we have entered an era of “stagnation” and need to lower our expectations, said Temple, believing the employment challenge is evidence of an economic malaise brought on by an era of diminishing innovation and demographic headwinds. “While we agree with the Stagnation argument that the demographic tailwind of the Baby Boom era is behind us, we are convinced that the longer-term employment problem is linked to the technological replacement of human workers“, says Pioneer Investments research.

The Weak Employment Cycle Began a Long Time Ago

The weak employment cycle began a long time ago with the deceleration of the labor force growth driven by secular trends, which is the foundation of the Stagnationist argument – demographics, including retiring baby boomers, female labor and immigration.

The “participation rate” (the share of the working-age population that is actually in the labor market) has been on the decline since 2000 as more people retire and leave the workforce. However, it is the younger population and the most productive sector of the workforce (25-54 year olds) that is the key driver. This segment should be the most resilient to cyclical and demographic trends, but it has clearly suffered a setback.

From Geographical Outsourcing to Technological Outsourcing

Growing competition from China is one reason for structural weakness in the U.S. job markets, explain Temple. Relocation of manufacturing to areas of the world, where labor was dramatically cheaper resulted in a loss of jobs in the U.S. Despite losing 7 million manufacturing jobs over three decades and manufacturing declining as a percentage of GDP (currently 13%, down from high teens in 1990’s), the absolute size of manufacturing output still grew. Other major sectors such as Construction, Mining, and Information have also experienced a broad decline since the beginning of the 21st century.

“Yet over this time frame, the economy has continued to grow. What gives? We believe that the geographical labor arbitrage that took place in the manufacturing sector over the past 25 years masked a wider phenomenon of technological labor arbitrage. And it is technological arbitrage – which we will examine in our next blog – that will dramatically shape th U.S. economy in the coming decade”, concludes Temple.

Higher Costs on the Horizon as Tax and Regulatory Changes Continue to Bite

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Asset managers, pension funds, banks and insurers expect to be spending more on tax and regulatory-related change in 2015 and for some years beyond, according to a new poll by BNY Mellon.

The poll, conducted at BNY Mellon’s recent third annual Tax and Regulatory Forum in London, found that 71% of the almost 250 delegates attending the event expected to see higher costs in the coming year compared to 2014.

While at the start of the event only 41% felt tax and regulatory-related costs would increase in 2015 – and 5% expected to see spending decline – by the conclusion of the day’s programme, which explored some 20 tax and regulatory changes, the consensus among delegates had shifted significantly.

Key findings of the poll included:

  • UCITS V will be a key focus for providers and clients alike in 2015. 43% of delegates believe the cost of compliance will be higher than for the Alternative Investment Fund Managers Directive (AIFMD), with 29% saying it would be about the same or less. 
  • As was the case with AIFMD, delegates were concerned about the proposed timing of upcoming regulatory changes and the potential for another bottleneck around compliance and approvals to materialise in Q1 2016. 
  • At this stage 65% of delegates polled were undecided as to when they will implement the necessary changes mandated by UCITS V.
  • Questioned as to when they expect to see the current wave of regulatory change to materially recede, 38% of delegates said 2017, while 54% said never.
  • When asked about outcomes for investors, responses echoed findings from previous BNY Mellon surveys. 51% of delegates expected investors will see higher costs and less choice – but also better protection. 
  • There was marked optimism – 82% of delegates – in that firms also see some opportunities arising from the current changes, with half of those respondents saying these opportunities would be material to their own business. 
  • Asked to identify those opportunities, 38% said cost savings, while 24% cited new markets and new asset classes. Only 15% identified new product developments.

Paul North, head of product, Europe, Middle East and Asia at BNY Mellon, said: “There seems to be a consensus that the next two years will be the most demanding in terms of tax and regulatory work and costs. Despite this, we also note the continued optimism among asset managers when they consider their longer term prospects around, and ongoing interest in, reducing costs and maintaining the pace of product development.”   

“The global trend towards tax transparency is at the heart of regulatory reform,” said Mariano Giralt, head of EMEA tax services at BNY Mellon. “The challenge for financial institutions is to keep pace with a host of new initiatives which include FATCA, the OECD’s Common Reporting Standard and potentially a Financial Transaction Tax which would cover 11 EU countries. These initiatives are adding significant compliance costs for financial institutions.”

Investec: Quality Businesses Typically Create Dependable Earnings Growth in Difficult Market Circumstances

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Investec: “Las empresas de calidad típicamente son capaces de inspirar confianza en entornos como el actual"
Photo: Clyde Rossouw, head of Quality at Investec Asset Management. Investec: Quality Businesses Typically Create Dependable Earnings Growth in Difficult Market Circumstances

Clyde Rossouw, Head of Quality at Investec Asset Management, explains his outlook for 2015.

What has surprised you most in 2014?

In terms of market performance the biggest surprise in 2014 has probably been the strength of the US stock market compared to most other markets around the world. In fact, it has been the only game in town; we have had a strong dollar and a great performing US stock market almost at the expense of everything else. We know that at the margin people have had the expectation that the US was getting better and that looks like it is running its course now.

How will ‘quality’ companies fare in 2015?

The ‘quality’ businesses we target have typically been able to create dependable, meaningful earnings growth in difficult market circumstances such as we have now, i.e. falling bond and commodity prices. Therefore, we would expect to see a similar consistency of earnings in 2015. In the past, when market participants have started to look for more dependability, quality assets have moved back into focus. As a result, we would expect a relative re-rating of such assets and that is typically the type of business in which we would look to invest in our strategies.

Where do you see the greatest opportunity in 2015?

We are focusing on two distinct categories: Companies that have pricing power and business models that are able to embrace ‘disruption’ risk.

Typically, businesses that have pricing power are able to put through inflationary or above inflationary rates of increases in their product prices. Tobacco is an obvious example: every year excise duties go up all around the world and even though the incidence of smoking is declining, tobacco companies have this pricing power mechanism built into their business model and are able to put up prices.

The other opportunity that we believe investors should focus on is businesses that have very strong market shares or business models that are able to embrace disruption risk. Technology is changing the way in which businesses have to operate. Therefore, investing in companies that are part of the disruption, but at the same time have very strong cash-generating business models, such as Microsoft, is, we believe, one way of offsetting some of the pricing risks that are at play in the market place.

What are the biggest risks to these views?

The biggest risk to any equity-based investment strategy would be if markets were to be just dismal and disappointing. We have had various episodes in the past, such as the financial crisis in 2008/9, where there was no obvious tailwind for stock market performance, and also in 2011, when there was a fear the euro zone might implode.

The biggest risk for us, therefore, is that even though we are invested in businesses that we think are more dependable in terms of their earnings, there could potentially be a significant drawdown because they are part of the equity markets.

How are you positioning your portfolio?

The businesses we invest in are typically of high quality. We also have sector preferences and have done a considerable amount of work looking at which parts of the market are able to produce companies that have intrinsically high quality characteristics. So, in terms of the natural leanings in our portfolio, we will always have a relatively high weighting in consumer staple names, certain parts of the pharmaceutical market and also within areas of technology. This does not mean that other parts of the market do not interest us, but generally they will have smaller weightings.

A cornerstone philosophically of the way we construct our portfolios is what some people would conceive to be inherent biases. But, based on academic evidence, we would rather invest in parts of the market where we believe we can maximise our probability of investment success.

In terms of individual stocks, our top ten holdings comprise a technology company, three pharmaceutical companies, a non-bank financial stock and a range of consumer staples companies with a specific focus on beverages, food, tobacco and home & personal care products. We still see opportunities across the board, but it is very much motivated by bottom-up opportunities and looking for superior businesses that have those key characteristics.

La Française Unveils its New Identity,
 a Symbol of Unity for its Four Core Business Activities

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Backed by its longstanding experience developed around its four core business activities, La Française has finalized its new visual identity after more than three years of intensive development. The Group is thereby donning a new image symbolising its new strategy which is resolutely international and firmly grounded in its four core businesses.

It also represents the relationship of trust which it fosters with its affiliates.

More modern, unifying, dynamic and visible, this new identity expresses the Group’s values, namely cohesion and responsibility, audacity and creativity, elegance and finesse, all combined with experience and expertise.

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On this occasion, the Group is redesigning its fourth core business, which is to become La Française Global Direct Financing, and its Asset Management business is renamed La Française Global Asset Management. Within this business activity, La Française des Placements is taking the name La Française Asset Management.

This approach reflects the highly cohesive organization between the Group’s different areas of expertise, focused on four core businesses:

  1. La Française Global AM (Asset Management);
  2. La Française Global IS (Investment Solutions);
  3. La Française Global REIM (Real Estate Investment Management);
  4. La Française Global Direct Financing. 


Xavier Lépine, Chairman of the Board of La Française, said: “It was essential to symbolise the Group’s new profile through our visual identity, to be perfectly aligned with our positioning, our values and our ambitions. The Group’s strength is based on these four core businesses and our capacity to connect and share our areas of expertise to provide our clients with even more innovation: these four loops are the perfect symbol of this, representing the links we have been forging with our clients for many years.”