Major Financial Centers Widely Differ in Breadth of Activity

7-Breadth of Activity

The coronacrisis may well be a  watershed moment – both business mix and key players are likely to change. Development strategies will involve regional and global positioning for flow and advisory business; developing new products and market capabilities as well as going offshore. Meanwhile exchanges further consolidate faster than ever before as the world gets even more networked.

Hong Kong – Critical Success Factors for Major Financial Centers

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Will latest U.S. moves to punish China over disputes on trade, IP, coronavirus origins and recent imposition of national security laws on Hong Kong affect its status as a major regional financial center? Eliminating policy exemptions and treating Hong Kong as part of China is bound to affect existing rules on travel, extradition treaties, investment and export controls as well as trade and financial market regulation.

We studied major financial centers around the world and uncovered some generic critical success factors. People – the availability of good personnel and the flexibility of labor markets:  Business Environment – regulation, tax rates, levels of corruption and ease of doing business; Market Access – levels of trading, as well as clustering effects from having many financial services firms together in one center; Infrastructure – the cost and availability of property and transport links; General Competitiveness – to be good at most things.

It is against such and other criteria that Hong Kong’s future competitiveness may be examined.

 

 

Offshore Financial Centers & Tax Havens Impacted in Coronacrisis BailOut

The offshore world is physically dwarfed and legally separated, but institutionally connected and closely linked.  For many smaller economies, this is sometimes seen – incorrectly – as an “easy way” to break into the financial industry. Now, many countries are refusing to let companies registered in offshore tax havens access financial aid from coronavirus bailout packages – Gibraltar, Bahamas, Andorra, Bermuda, British Virgin Islands, Cayman Islands, Panama  are increasingly scrutinized. France, Poland, Belgium and Denmark exclude companies from taxpayer-funded relief programs. But Ireland, the UK, Luxembourg and the Netherlands as well as U.S.  companies that engaged in corporate inversion transactions are eligible.

3-Offshore Financial Centers

Will Major Financial Centers Change After Coronacrisis?

Despite the coronacrisis and Brexit, New York and London to continue to dominate. Other important regional and specialist centers are increasingly vying. Frankfurt, Singapore and Tokyo will continue to assert role as hubs, with the status of Hong Kong now somewhat challenged. Financial centers have critical mass, transparent, liquid and broad markets alongside the talent required to execute business – these skills and structures can be adapted for new markets.

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Will Hong Kong Remain a Major Region Financial Center?

China to strip Hong Kong of legal autonomy. U.S. to decline certification of autonomy from China which may trigger financial sanctions under Magnitsky Act and other  provisions under Hong Kong Human Rights and Democracy Act. This will affect trades, visas, customs, banking and law enforcement and regulation cooperation. Financial centers are always reflections of a wider context, from current market issues, to local financial players, to international investor flows, to the culture and history of the country in which they operate.

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European Union 2020 Coronacrisis Stimulus Twice that Provided in 2008. Equals Entire Global Stimulus During 2008 Global Financial Crisis.

After today’s NextGenerationEU announcement I did a back of envelop calculation to contrast the already announced, and proposed stimulus, with the European outlay during 2008. The data shows that European Union 2020 coronacrisis stimulus is twice that it provided in 2008. Infact, it equals the entire global stimulus during 2008 Global Financial Crisis. Still too early to arrive at implications of this huge outlay.

Pandemic Emergency Purchase Program has envelope of €750 billion to buy government and corporate bonds. Complements big bank stimulus package. Eases collateral standards and removes self imposed restrictions on purchases. Next Generation EU of €750 billion as well as targeted reinforcements to the long-term EU budget for 2021-2027 will bring the total financial firepower of the EU budget to €1.85 trillion.This is near equal to the $2,000 billion stimulus provided across the world during the 2008 global financial crisis.

18- EU Stimulus19-EU Stimulus

EU Unveils New Recovery Instrument Next Generation EU

#ActiveAllocator Research- ‘Today, the European Commission has put forward its proposal for a major recovery plan. To ensure the recovery is sustainable, even, inclusive and fair for all Member States, the European Commission is proposing to create a new recovery instrument, Next Generation EU, embedded within a powerful, modern and revamped long-term EU budget. The Commission has also unveiled its adjusted Work Program for 2020, which will prioritize the actions needed to propel Europe’s recovery and resilience.’

We welcome this initiative and await details.

17- next gen EU

 

Foreign M&A Deals: Bloomberg May 23 article “China’s $941 Billion Sovereign Fund Seeks More Resilient Assets”

Bloomberg May 23 article “China’s $941 Billion Sovereign Fund Seeks More Resilient Assets”

We expect much greater scrutiny for foreign M&A deals as well as delays especially for direct investments made by Sovereign Wealth Funds, particularly China Investment Corp. We describe the ‘typical’ approval process timeline and outline key considerations in the highly opaque and secretive CFIUS review process.

4-timeline

Acquirer Considerations:

What is the host country for investor?

  • UK, Europe, Canada, Japan, Korea, raise few security or political issues
  • 7 countries investing the most in the United States, all of which are United States allies (the United Kingdom, Japan, Germany, France, Canada, Switzerland, and the Netherlands) accounted for 72.1 percent of the value added by foreign-owned affiliates in the United States and more than 80 percent of research and development expenditures by such entities
  • China raises unique issues

Does the acquirer have a good record of compliance?

  • Focus on US, foreign laws and previous CFIUS commitments
  • Focus also on acquirer’s record with respect to its own products or services or competition practices

Does the acquirer have state ownership?

  • Have the acquirer’s leaders been implicated in any law enforcement or regulatory actions?
  • Has the acquirer effectively complied with previous CFIUS commitments?
  • Will investment raise political issues in Congress?

 

Target Considerations:

  • How important are target’s assets to national security of the United States?
  • Are there government contracts?  With which agencies? Classified?
  • Is target a direct supplier to U.S. government or subcontractor?
  • Does the target have export-controlled technologies?
  • Are the target’s assets considered “critical infrastructure”?
  • Does target have outstanding litigation or competitive issues that could lead competitor to politicize CFIUS process?
  • Who are the target’s non-government customers?
  • Has the target effectively complied with previous CFIUS commitments?
  • Does target have dominant position in market for key technologies or services?

Economy: Oil Market May 22, 2020

Oil prices rise to $33. Storage crisis easing. Supply curtails to 11.5 million b/d. Fuel demand increases and stockpiles reduce 5 million barrels. States ease lock-down and travel rises.  Demand uptick matched with OPEC supply cuts, and U.S. wells shutdown. But gasoline demand is still soft, and outlook is still fragile with low prices discouraging production.

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Do Illiquidity Provisions Boost Hedge Fund Performance?

Retail investors who are ineligible to invest in quality hedge funds, in hard to access investment vehicles, either because they do not meet minimum levels of wealth or income standard, or the high subscription amounts often needed to participate in such funds gravitate to liquid alternative investments. The rise of liquid alternative investment funds, packaged in mutual fund formats over the past years, as the fastest growing category of “alternative investments” is now well documented. McKinsey & Company suggest “retail alternatives will be one of the most significant drivers of U.S. retail asset management growth over the next five years, accounting for up to 50 percent of net new retail revenues”.

With liquid alternatives beginning to find increasing traction in institutional portfolios too, the question is – are they an effective substitute for hedge funds and other illiquid structures? Little empirical fact based exists and opinions abound.

Our research at ActiveAllocator.com attempts to answer this question and concludes that they are not.

Retail investors in considering hedge funds immediately encounter a wide variety of strategies, organizations and structures. Indeed, hedge funds, rather than being an asset class, are broadly a collection of governance structures and investing techniques with many common structural features. Unfortunately, from an investor’s perspective, it is often difficult to decipher which structural features are useful, which imply tradeoffs and which are simply undesirable. The dearth of empirical research leaves investors to make intuitive judgments about what features they should favor.

We re-examined a sub-set of provisions governing fund investing- liquidity terms. In contrast to alternative mutual funds, which allow investors to redeem their holdings on a daily basis with little or no advance notice, hedge fund investors are subject to a variety of terms that may restrict their ability to access their capital. All things equal, investors prefer more liquid investments to less liquid investments. Liquidity provides investors with a valuable option – specifically the opportunity to trade in and out of investments in order to rebalance a portfolio, respond to unforeseen cash flow requirements or redeploy capital towards other opportunities.

While the benefits that liquidity offers to investors are clear, the costs associated with greater liquidity are less apparent. We explored two related questions:

•Do investors pay a price – in terms of lower investment returns – for better liquidity? In other words, do funds with more favorable liquidity terms underperform less liquid funds?

•If the answer to the question is yes, then what drives this cost? In other words how can one explain the under-performance of more “liquid” funds?

Our research finds that there has been a substantial performance cost from offering increased liquidity. The under-performance cannot be attributed to fee levels or the strategy pursued by a particular fund. We are unable to attribute the liquidity cost to differences in skill across managers; we do not find strong evidence that less skillful managers (whose performance is weaker) offer more attractive liquidity terms.

Instead, our results indicate that managers who offer more restrictive liquidity terms are able to outperform more liquid managers because they are able to pursue a broader range of attractive trading opportunities.

Download PDF:

Do Illiquidity Provisions Boost Performance

Transcend Cookie Cutter ‘Model Portfolios’ in 10 clicks, 10 minutes, 1/10th Cost

ActiveAllocator helps you go beyond traditional model portfolios by utilizing disruptive technology driven personalization. Create directional, semi-directional and non-directional market exposures in minutes.

  • Aggregate your holdings in seconds across your banks, financial advisors and custodians. Arrive at your true economic exposure. Go beyond financial products, and funds and securities you own. Understand why you may be sub optimally allocated.

 

  • Then, in seconds, optimize your portfolio on by linking your brokerage accounts and send order messages to your broker directly from ActiveAllocator’s platform. Once done, import real-time portfolio data from your brokerage firm, and see the most current picture of your portfolio’s – not historical but rather,  forward facing characteristics.

 

  • Compare your portfolio with others’. Including those, supposedly bespoke, being created by private banks and wire-houses at huge fees with attendant product driven conflicts of interest.

 

  • Increase your asset class universe to over 50 sub asset-classes including alternative investments, automate implementation, trading and periodic re-balancing.

 

  • Express your own investment views while making strategic allocation decisions.

 

Commenting on WSJ Article May 18 2020, “Saudi Fund Snaps Up Some U.S. Stock Bargains”

WSJ article May 18, “Saudi Fund Snaps Up Some U.S. Stock Bargains”.  Saudi Arabia’s $300 billion SWF, The Public Investment Fund,  in Q1 2020 bought around $500mm equity each in Facebook, Walt Disney, Marriott, Cisco, Citigroup, Bank of America, Boeing, Carnival, Live Nation Entertainment inter-alia.

The U.S. has long been very open to receiving foreign capital in U.S. firms. Now we see a rise in protectionism,  trade barriers and inward-looking sentiment seeping into policy and regulation. The number of transactions reviewed by the Committee on Foreign Investment in the United States (CFIUS) has been growing and the fear of foreign state governments buying distressed assets increases. Opposition is no longer just vocal; a lot of activity is taking place behind the scenes in Washington. Constituency interests, too are crowding out traditional policy interests. Any involvement, other than through voting of shares, in substantive decision making of key U.S. companies is likely to be scrutinized. For mergers and acquisitions post CFIUS review, the standard process could now be longer than the typical 45-60 days if the transaction is believed to be a “threat to impair” national security.

This will be especially true for direct investments, more than for portfolio investments. How different SWFs are treated depends in large measure on how transparent they are, national security concerns as well as reciprocity.

11=Saudi PIF

Technology Driven Personalization in Financial Advice

ActiveAllocator’s core growth strategy capitalizes on several long-term industry trends that continue to be valid and even stronger in 2020. One being mass-customization. Technology driven mass customization is affecting many customer oriented industries, driving clients to expect highly personalized services uniquely tailored to their specifications. ActiveAllocator allows the “traditional” advisor to provide a modern digital advice experience. Recognizing that the “market of one” is the new norm, we go far beyond broad meaningless categories such as the wide spectrum of “very conservative” to “very aggressive” investors. Rather, our system is designed to drive the individualization of every aspect of asset allocation, down to the level of a single client.

Customers demand personalization without realizing they are demanding it, as they grow accustomed to companies anticipating their needs and offering what they’re looking for – sometimes before they even know what that is. Retailers and travel companies are using predictive tools and algorithms to exceed expectations, yet digital teams at financial firms have been slow to re-engineer websites and apps to enable highly personalized digital experiences. As consumers become more accustomed to personalized services – from online music selection, to customized exercise plans, to personal shopping, to travel – expectations will further rise. Within the financial advice sector, our approach rapidly exposes the fallacy of the “one size fits all” solution approach – such as those embodied in model portfolios and managed accounts.

Personalized service is going to be a key weapon in advisors’ battle, against competition from and disintermediation by, digital advice platforms. Once investors realize that the same managed accounts offered by advisors can be manufactured in minutes by robo-advisors at a fraction of fees, advisor fee compression is but inevitable. In an era when money can be managed effectively, efficiently and cheaply, ActiveAllocator helps advisors move up the value curve. Marrying our cutting edge fact-based, algorithm-driven predictive analytics with the advisor’s special understanding of the client’s unique circumstances drives superior outcomes. We believe that this powerful combination goes far beyond anything offered by emerging digital financial advice platforms, robo advice and digital investment managers.

 

 

Which Asset Class is Now Attractive For You? Which is Not?

The world has changed in 2020 and so should your investment portfolio. But has it?

Given what you/ your client already owns within a portfolio, should  one own more of a particular asset class? Or less? What is attractive and what is not?The most consequential, and often best decisions, are those that are made at the margin. However marginal decomposition, on a forward- not backward -looking basis within portfolios is easier said than done. While there is much written in the academic literature, one is often hard pressed to arrive at fact based decisions at the moment of making investing calls.

In the past such was often relegated to opinion, conjecture and gut feel. Not anymore. ActiveAllocator calculates it for you in 15-20 seconds.

New USPS Postmaster General Louis DeJoy Should Divest Real Estate Portfolio

The changing dynamics and competitive pressures of  the postal industry should catalyze introspection to monetize its real estate portfolio. USPS core business is not be a real estate owner. Portfolio analysis and segmentation ensures that maximum value is extracted real estate owned. We urge new Postmaster General Louis DeJoy to segment and monetize  its considerable real estate assets.

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Confucius Say ‘Man Who Give Money to Financial Advisor Quickly Become Poor’

ActiveAllocator dynamic constructed portfolio over-performed the 60/40 portfolio by 300 percent YTD. Over-performance attribution from reduction in maximum draw-dawn, arresting negative skewness, wider asset class universe, active active management. Adding typical financial advisor fees of +1% further increases differential in performance.

YTD ActiveAllocator +6.34%

YTD 60/40 Blend        -3.1%

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Economy: Unemployment Driven By Educational Level and Location

Lesser educated now most adversely affected and constitute the bulk unemployed. Only 7 percent of top quartile earning urbanites report losing employment, along with 5 percent of upper class, well-to-do people and just 4 percent of those with post-grad schooling. Wage disparity grows during coronacrisis.

3-unemployment rate by education