Corporate bond funds are not the worry as QE era ends
The focus on regulators should instead be on clearing houses and ETFs, whose influence has swelled
by: Huw van Steenis
As central bankers seek to wean markets off quantitative easing and exit the dangerous experiment of negative rates, they increasingly fret about the resilience of credit markets. How worried should they be?
The US Treasury’s Office for Financial Research, the European Central Bank and the Bank of England have all issued warnings in their financial stability reports voicing concern over whether we might see fire sales that could amplify risks at what is probably the end of a 30-year bull market in bonds.
It is true that investors in fixed-income mutual funds have played a growing role in funding economic recovery as banks focus on deleveraging and repair. In the eurozone, financing from the credit market has more than offset the €500bn funding gap left by banks. As a result, mutual fund holdings of corporate bonds doubled in both Europe and the US since 2009.
However, corporate bond funds have never been particularly flighty and have withstood periods of stress far better than the critics imagine. The bond rout of 1994 saw investors redeem 5 per cent in the worst three months, according to Morgan Stanley and Oliver Wyman. No crisis since has seen redemptions of more than 6 per cent in a quarter, versus cash and near cash on standby of 5 per cent to 10 per cent today.
Bond funds have just passed another real life stress test. Despite a fall over the past three months of $3tn in the value of bond markets, they have seen no more than 2 per cent redemptions.
One reason is the objectives of those who invest in the funds. Over half of funds in the US and UK are held in tax-incentivised retirement savings accounts, so run risk is extremely low. Another is that asset managers have been on heightened alert about the reduced liquidity provided by bond dealers as financial regulation has reshaped the ecosystem. Many funds have adapted their asset allocation, trading tools and run internal fire drills to ensure they can meet their commitments.
What’s more, corporate bond funds are only a part of the credit puzzle. New Fed data show mutual fund holdings of corporate bonds are just 17 per cent of US-held bonds while sterling-focused bond funds represent just 15 per cent of UK bonds.
But there is one other crucial development that many are missing: the development of exchange traded funds may have indirectly made mutual funds more stable. Dynamic investors — like asset allocators looking to change exposures to major events — increasingly use ETFs. This means that ETFs are far more prone to big swings in investor appetite than mutual funds.
This does not mean there should not be keen regulatory focus. I have argued in these pages that bond funds should be subject to internal stress tests to ensure they can honour redemptions — because there will always be outliers.
The International Organization of Securities Commissions is looking to announce further global standards on how to test corporate bond funds in mid-2017. The strongest standards would be ones that allow firms to use models to quantify risk, take into account the behaviour of different investors and the historical experience of illiquidity during moments of market stress.
So if bond funds are not a risk to financial stability as we exit QE, what should the focus be?
First the players, such as ETFs and clearing houses, whose role has been significantly enhanced from the reshaping of the global markets should be high on the agenda for 2017. Second, market regulators should take stock of the large number of positive changes in their rule books to ensure that the cumulative impact of new standards safeguard investors without disproportionately hurting fixed-income market efficiency.
One particular area ripe for reappraisal is how to report and trade large blocks of corporate bonds. Asset managers and banks have become concerned about the depth of liquidity, particularly in periods of stress, and raised this with Finra in 2015. Equity markets have for many years been able to operate with integrity having exemptions for large “block” trades. However, fixed income reporting rules prohibit this in the US and this could form a welcome part of the reappraisal of Dodd-Frank and related rules. Alas, new Mifid rules will also introduce this challenge to Europe just as rates are set to rise.
Third, policymakers should focus on stress testing and galvanising action at banks where risks still overhang from bad debts, such as in parts of the eurozone. Finally, investigate approaches that look at the whole system in the round. That is why I am particularly looking forward to the BoE’s proposed simulation of how credit markets may function when banks, insurers, pension funds and mutual funds are all together put under stressed scenarios.
Huw van Steenis is global head of strategy at Schroders and a member of the World Economic Forum Agenda Council
domingo, febrero 26, 2017
CORPORATE BOND FUNDS ARE NOT THE WORRY AS QE ERA ENDS / THE FINANCIAL TIMES
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Etiquetas:
Bond Markets,
ETF´s
domingo, febrero 26, 2017
A NEW JACKSONIAN ERA? / SAFE HAVEN
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Etiquetas:
Andrew Jackson,
Donald Trump,
U.S. Economic And Political
A New Jacksonian Era?
By: The Burning Platform
"Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out!"
- Andrew Jackson
"There is nothing the political establishment will not do, and no lie they will not tell, to hold on to their prestige and power at your expense. The Washington establishment, and the financial and media corporations that fund it, exists for only one reason: to protect and enrich itself. This is a crossroads in the history of our civilization that will determine whether or not We The People reclaim control over our government. The political establishment that is trying everything to stop us, is the same group responsible for our disastrous trade deals, massive illegal immigration, and economic and foreign policies that have bled this country dry.
The political establishment has brought about the destruction of our factories and our jobs, as they flee to Mexico, China and other countries throughout the world. It's a global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth, and put that money into the pockets of a handful of large corporations and political entities."
- Donald Trump
Andrew Jackson was a bigger than life figure who lived from the early stages of the American Revolution until the country was on the verge of splitting apart over slavery and states' rights issues. Born in the Carolinas shortly after his father died in an accident, he acted as a courier during the Revolutionary War. Andrew and his brother Robert were captured by the British and held as prisoners and nearly starved to death in captivity.
When Andrew refused to clean the boots of a British officer, the officer slashed him with a sword, leaving deep scars on his left hand and head. His brother died of smallpox and his mother from cholera in 1781, leaving him an orphan at the age of 14. He blamed the British for their deaths and held an intense hatred of the British for the rest of his life.
Jackson was a grudge holder. He was a courageous military hero, nicknamed Old Hickory by his troops because of his toughness. He was combative and vindictive. He was a self-made lawyer, military leader and statesman. He was a wealthy plantation owner and merchant. Over one hundred and fifty slaves worked on his plantation.
He fought Indians, the British, politicians, and bankers. He was scorned and ridiculed by the press. Establishment politicians cheated him out of a presidential victory, but that loss motivated him to crush his political enemies in the next election. He was a devoted dependable friend to his compatriots and a steadfast adversary to those who crossed him.
If you think the fake news media and vitriolic political campaigns, personally attacking the families of candidates was a modern day phenomenon, you would be badly mistaken. American politics sinking into the sewer and sensationalistic journalism existed from the earliest days of our country.
Jackson's controversial marriage to Rachel Robards made Jackson resentful towards any attack on her honor. He had mistakenly married her before her divorce was official. An attack on their honor published in a local Nashville newspaper led Jackson to challenge Charles Dickinson to a duel.
Charles Dickinson was considered an expert shot. Jackson decided to let Dickinson fire first, betting his aim might be off in his haste. Dickinson did fire first striking Jackson just below the heart. The musket ball remained lodged in his lung for the rest of his life. Under the rules of dueling, Dickinson had to remain still as Jackson took aim and killed him. Jackson's behavior in the duel outraged men of honor in Tennessee, who called it a brutal, cold-blooded killing and saddled Jackson with a reputation as a violent, vengeful man. As a result, he became a social outcast.
Jackson's wound didn't keep him from becoming a national military hero nine years later by leading his outnumbered troops to an overwhelming victory over the British at the Battle of New Orleans during the War of 1812. His hatred for the British going back to the Revolutionary War likely motivated him to defend New Orleans to the death. Jackson took command of the defenses, directing 5,000 militia from various Western states. He was a strict officer but was popular with his troops. Jackson's soldiers won a crushing victory over 7,500 attacking British soldiers.
The British had 2,037 casualties: 291 dead (including three senior generals), 1,262 wounded, and 484 captured or missing. The Americans had 71 casualties: 13 dead, 39 wounded, and 19 missing. This victory propelled him to national prominence and spurred his presidential aspirations. The common man saw Jackson as a populist hero. He continued to build his militaristic resume by defeating the Seminole and Creek Indians in Florida, who were secretly supported by the British and Spanish.
In another example of history rhyming, the 1824 presidential election was far more dysfunctional and corrupt than the most recent election campaign. There was essentially one political party, the Democrat-Republican Party. The states put forth four candidates: Andrew Jackson, William Crawford, John Quincy Adams, and Henry Clay. In a hotly contested campaign, filled with nasty accusations and condemnations, Jackson won the popular vote and a plurality of the electoral votes, but not a majority. Therefore, the decision went to the House of Representatives. As an establishment outsider, Jackson was at a disadvantage.
In what became known as the "Corrupt Bargain", Henry Clay, the current Speaker of the House, convinced Congress to elect Adams, who then made Clay his Secretary of State. For the next four years Jackson and his supporters railed against the Adams administration calling it illegitimate and tainted by corruption and an aristocratic governing style. The Jacksonians rightly denounced the Adams administration for its pork barrel spending and rewarding of special interests. Jackson's defeat burnished his political credentials as many voters believed the "man of the people" had been robbed by the "corrupt aristocrats of the East".
"I weep for the liberty of my country when I see at this early day of its successful experiment that corruption has been imputed to many members of the House of Representatives, and the rights of the people have been bartered for promises of office."
- Andrew Jackson
He learned from his mistakes and built a coalition of support in 1828, with John C. Calhoun as his running mate and Martin Van Buren as a key ally. He created the Democratic Party and when his opponents referred to him as "jackass" he embraced the insult and used it as a symbol for his campaign. The donkey later became the symbol of the Democratic Party. The campaign was mean and personal with insults and accusation flying in the press. It reached a low point when the press accused Jackson's wife Rachel of bigamy. Jackson won the election in an electoral landslide. Rachel died suddenly on December 22, 1828, before his inauguration, and was buried on Christmas Eve. The stress of the election led to her heart attack. He blamed Adams and his cronies for her death.
Jackson's eight year presidency marked a turning point in American politics. He rode a wave of populism to victory and it marked the first time political power had passed from establishment elites to ordinary voters based in political parties. Jackson's philosophy as President followed much in the same line as Thomas Jefferson, advocating Republican values held by the Revolutionary War generation. He attempted to conduct his presidency with high moral standards, but ultimately fell short.
He attempted to limit the Federal government, but when South Carolina opposed the tariff law he took a strong line in favor of nationalism and against secession. He also used the power of the Federal government to forcefully relocate Indian tribes to west of the Mississippi. He despised the moneyed interests and dismantled the Second Bank of the United States. His actions indirectly led to the Panic of 1837.
In another occurrence with similarities to Trump's cabinet selections, Jackson believed the president's power was derived from the common man. Instead of choosing hand- picked party cronies for his cabinet, he decided choosing businessmen, who would get things done and follow his lead, was the better course. Having headstrong businessmen with huge egos and vicious gossip mongering wives in his administration would have fit in nicely in our present day degraded Kardashian selfie culture. Salacious rumors and sex scandals led to bitter partisanship between Eaton, Calhoun and Van Buren. Jackson was forced to fire and revamp his entire cabinet in 1830.
The issue which most reflected Jackson as the president of the common man versus the vested interests was his struggle against Nicholas Biddle and the Second Bank of the United States. It was chartered in 1816 by James Madison in an effort to restore an economy ravaged by the War of 1812.
Biddle attempted to renew its charter in 1832 and successfully got the renewal through Congress.
Jackson, believing that Bank was a corrupt monopoly whose stock was mostly held by foreigners, vetoed the bill. Jackson used the issue to endorse his democratic values, contending the Bank was being run by a den of vipers for the benefit of the wealthy elite. Jackson stated the Bank made "the rich richer and the potent more powerful". He never stopped fighting for the common man.
"You are a den of vipers. I intend to rout you out and by the Eternal God I will rout you out. If the people only understood the rank injustice of our money and banking system, there would be a revolution before morning."
- Andrew Jackson
His veto became the primary issue in the 1832 presidential campaign against Henry Clay, as his opponents rebuked his veto as the work of a demagogue, claiming he was using class warfare as a ploy to get the support of the common man. Proving a populist message brought directly to the people can defeat an establishment machine, Jackson crushed Clay in the election, with 55% of the popular vote and receiving 219 electoral votes to Clay's 49. He warned the people against allowing central bankers to take control of the government. We didn't heed his warning. Whether Trump has the courage of Jackson in taking on the Central banker den of vipers is yet to be seen.
"The bold effort the present (central) bank had made to control the government are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it."
- Andrew Jackson
Jackson knew powerful banking and corporate interests were the antithesis of how a government by the people, for the people and of the people should function. He also knew debt and fiat paper created a speculative gambling economy, not beneficial to the common man over the long-term. Giving away the power of the people to bankers and corporations created as much havoc and suffering in the 1830s as it has today.
"The mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control, from the multitude of corporations with exclusive privileges which they have succeeded in obtaining, and unless you become more watchful in your states and check this spirit of monopoly and thirst for exclusive privileges you will in the end find that the most important powers of government have been given or bartered away."
- Andrew Jackson
After disposing of the Bank of the United States in 1833, Jackson removed federal deposits from the bank and the money-lending functions were taken over by the multitude of local and state banks across America. The national economy boomed as the federal government coffers overflowed with revenue from tariffs and the sale of public lands in the west. In January 1835, Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished. He rightfully saw the national debt as a curse, only benefitting the moneyed interests.
"I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country."
- Andrew Jackson
I find it amusing historians of a Keynesian persuasion blame Jackson's dismantling of the central bank in 1833 for the Panic of 1837 and the subsequent four year depression. The true cause of the Panic and depression was reckless land speculation by the rich, financed by state and local bankers who failed to exercise due diligence, risk management or restraint on their lending practices. Does that sound familiar (2008 Financial Crisis)? Bankers have been the perpetual cause of financial crisis since the inception of this country.
Jackson was forced to rein in the rampant credit bacchanal by issuing the Specie Circular, which required buyers of government land to pay in specie (gold or silver coins). This was another example of when the tide goes out you see who was swimming naked. The credit speculators had no gold or silver and bank losses threw the country into panic and depression.
Just as the Fed induced housing boom and the Wall Street mortgage and derivatives control fraud were the cause of the 2008 financial crisis, it was banker fueled land speculation which caused the 1837 Panic. Jackson was just the pin popping the bubble before it got even bigger.
The non-stop speculation about assassinating Trump as the left wing solution to losing a fair election has reached epic proportions on social media. Of course, cowardly social justice warriors, who don't believe in free speech, election results, the Constitution, or the rule of law, are good at making hollow threats and causing destruction within their liberal enclaves of hate, but they don't have the balls to actually attempt an assassination. Back in Jackson's day of duels and face to face justice, there were no safe spaces and trigger warnings.
The first assassination attempt on a sitting president occurred in 1835 outside the U.S. Capitol when Richard Lawrence, an unemployed house painter from England, aimed two pistols at President Jackson as he was leaving the East Portico after a funeral. Both pistols misfired. As Lawrence was disarmed and restrained by, among others, Davey Crockett, Jackson attacked him with his cane. Lawrence blamed Jackson for the loss of his job.
Afterwards, due to public curiosity concerning the double misfires, the pistols were tested and retested. Each time they performed perfectly. Many believed Jackson had been protected by the same Providence they believed also protected their young nation. The incident became a part of the Jacksonian mythos.
There is no doubt Jackson and Trump have similarities in their confrontational natures, blunt talk and fiery tempers. Historian H.W. Brands noted how opponents were terrified of his temper in his autobiography of the iconic figure:
"Observers likened him to a volcano, and only the most intrepid or recklessly curious cared to see it erupt." His close associates all had stories of his blood-curling oaths, his summoning of the Almighty to loose His wrath upon some miscreant, typically followed by his own vow to hang the villain or blow him to perdition. Given his record - in duels, brawls, mutiny trials, and summary hearings - listeners had to take his vows seriously."If twitter had existed in the 1830s, Jackson would have surely been hurling insults at his opponents and the feckless press. Jackson used his reputation for rage and fearsomeness to achieve his policy goals by intimidating his opponents. If you think Trump's insults hurled at Hillary Clinton, Jeb Bush and Chuck Schumer have been too un-presidential like, consider Jackson's final thoughts about his two most hated political opponents.
"After eight years as President I have only two regrets: that I have not shot Henry Clay or hanged John C. Calhoun."
- Andrew Jackson
It is fascinating how the intellectual elites of Jackson's time had the same level of contempt for the common man as the arrogant ruling elite have for the "deplorables" inhabiting the towns and hamlets of flyover America today. Alexis de Tocqueville, a pretentious French intellectual, and contemporary of Andrew Jackson, treated Jackson, his presidency, and his supporters disdainfully in his book Democracy in America, written during Jackson's presidency. The haughty condescension of the rich and powerful elite towards the plebs has spanned the ages, with the NYT, Washington Post and CNN scornfully filling the role of Tocqueville today.
"Far from wishing to extend the Federal power, the President belongs to the party which is desirous of limiting that power to the clear and precise letter of the Constitution, and which never puts a construction upon that act favorable to the government of the Union; far from standing forth as the champion of centralization, General Jackson is the agent of the state jealousies; and he was placed in his lofty station by the passions that are most opposed to the central government. It is by perpetually flattering these passions that he maintains his station and his popularity. General Jackson is the slave of the majority: he yields to its wishes, its propensities, and its demands-say, rather, anticipates and forestalls them.
General Jackson stoops to gain the favor of the majority; but when he feels that his popularity is secure, he overthrows all obstacles in the pursuit of the objects which the community approves or of those which it does not regard with jealousy. Supported by a power that his predecessors never had, he tramples on his personal enemies, whenever they cross his path, with a facility without example; he takes upon himself the responsibility of measures that no one before him would have ventured to attempt. He even treats the national representatives with a disdain approaching to insult; he puts his veto on the laws of Congress and frequently neglects even to reply to that powerful body. He is a favorite who sometimes treats his master roughly."
- Alexis de Tocqueville, Democracy in America
Andrew Jackson was most certainly a flawed human being, with a multitude of personal tragedies coalescing to form his persona and worldview. His hardscrabble upbringing, fighting nature, contempt for republican elitism, and disdain for the greedy acolytes of wealth and privilege, formed his political philosophy and popularity among average citizens. Jackson's goal was to rid government of class preferences and shred the credit driven advantages of the wealthy minority, whose only concern was their personal wealth.
He dedicated himself to ridding the government of those who exploited the majority to benefit the few. Equal rights and limited government while ensuring the wealthy establishment cronies could not enrich themselves at the public trough by capturing the governmental levers of power and plundering the nation's wealth, was the vision espoused by the Jacksonians.
By demonizing the moneyed aristocracy and supporting the common man, Jackson broadened electoral participation to include an overwhelming majority of white men. Jackson's success in democratizing the political process works when an educated involved civic minded electorate is active in the process. As time passed and the electorate expanded, our democracy has devolved into a vote buying exercise of who promises the masses the most. Huge portions of the electorate are feeble minded, free shit seeking ideologues, with no concern for the long-term sustainability of the nation.
The voice of the people had been silenced by Deep State special interests until Trump's unlikely victory in November.
The Jacksonian Era of operating government for the benefit of the people was short lived, as the power of the elites reconstituted among the Northern business interests and Southern planters - ultimately leading to the Civil War resolution and further expansion of Federal government power and control. Jackson's efforts were noble but ultimately a failure. Will Trump's rhetoric of taking back government for the people ultimately fail? Can the rich and powerful vested interests be defeated? The odds are heavily against Trump, but we are in for a spectacular fireworks display as history unfolds.
"It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. Distinctions in society will always exist under every just government. Equality of talents, of education, or of wealth cannot be produced by human institutions. In the full enjoyment of the gifts of Heaven and the fruits of superior industry, economy, and virtue, every man is equally entitled to protection by law; but when the laws undertake to add to these natural and just advantages artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society- the farmers, mechanics, and laborers- who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government."
- Andrew Jackson
In Part Two of this article I will ponder whether the Trumpian Era will see Trump's populist agenda successfully implemented or whether we experience a spectacular failure.
domingo, febrero 26, 2017
THE PROMISE OF MIDDLE EAST SOVEREIGN WEALTH FUNDS / PROJECT SYNDICATE
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Etiquetas:
Middle East,
Sovereign Wealth Funds
The Promise of Middle East Sovereign Wealth Funds
Alissa Amico
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DUBAI – A decade ago, sovereign wealth funds (SWFs) from the Middle East and North Africa (MENA) were the behemoths arriving on the global financial scene. Funds like the Qatar Investment Authority (QIA) grabbed headlines as they gobbled up assets – including listed securities, private companies, and real estate – primarily in Europe and North America. But the world in which SWFs invest has changed, and they must change with it.
Over the last 20 years, as strong hydrocarbon revenues have enabled Middle Eastern SWFs to proliferate and grow, a variety of labels have been created to categorize them, including stabilization funds, future generation funds, and investment funds. But most sovereign investors – which also include sizeable social security and pension funds, such as Saudi Arabia’s General Organization for Social Insurance and Public Pensions Agency – belie clear-cut labels.
Few Middle Eastern SWFs are pure financial investors. Because many of them held stakes in state-owned enterprises before becoming financial investors, their holdings tend to be diverse, and often include those same SOEs, as well as real estate and equity stakes in listed and unlisted companies.
These holdings also include a growing volume of assets in the developed economies – a reality that has raised eyebrows in Europe and the United States.
To allay concerns over SWFs’ potential political considerations, the International Monetary Fund convened 26 SWFs – over 30% of them from the Middle East – in 2008 to develop the Santiago Principles. The goal was to promote transparent and sound governance of SWFs, ensure that they adequately account for investment risk, and help to maintain global financial stability.
But, since then, the situation has changed substantially. In the aftermath of the 2008 global financial crisis, investment capital became far scarcer and efforts to ensure SWF transparency and accountability gave way to competition for their capital. Far from a source of apprehension, SWFs have become beneficiaries of fiscal incentives designed to encourage investment in Europe.
At the same time, however, Middle Eastern SWFs have confronted new constraints on their international purchasing power, owing to fiscal austerity at home, induced by falling hydrocarbon prices. Domestically, governments have largely abandoned their efforts to divide sovereign holdings into multiple “pockets” that reflected the funds’ diverse investment objectives and wider political considerations.
The June 2016 announcement of a merger between Abu Dhabi’s International Petroleum Investment Company and Mubadala Development Company – two entities that had quite different objectives and strategies – heralded another change. Consolidation of sovereign assets became the name of the game. Saudi Arabia’s Public Investment Fund (PIF), for example, is now expected to become an almost $2 trillion investment vehicle, with holdings including SOEs and financial investments.
Even prior to this, SWFs in the MENA region held substantial assets in public equity markets at home and abroad. According to a recent analysis by GOVERN (of which I am Managing Director), the state is a significant shareholder in 89 of the region’s 100 largest listed firms – and a majority shareholder in 34. Sovereign investors, including SWFs, are the largest institutional investors in most Arab stock exchanges, holding over 40% of the total market capitalization in the region.
As SWFs consolidate their assets, their attention will likely be focused on domestic exchanges.
After all, any further sales of state-owned assets will be conducted through public equity markets, owing to the interest of the region’s policymakers in developing local capital markets and improving the transparency of the privatization process. In times of crisis, SWFs could also be mobilized to inject assets into domestic markets to restore market stability. Tellingly, the mandate of the Turkish sovereign fund includes deepening the domestic capital market.
The time has come to consider more carefully the impact of SWFs on companies’ governance and performance. That issue was not addressed in detail by the Santiago Principles, which focused on SWF transparency. Nor has it been adequately addressed by domestic capital-market regulators, who have focused on developing rules and regulations for listed companies, not the investors who might act as their owners.
Middle Eastern SWFs, as owners of full and partial SOEs, are often active shareholders – and sometimes even manage companies directly, side-stepping boards in the name of greater decision-making efficiency. Yet they are not using their influence to improve governance or support sustainability across the board. As financial investors, SWFs are not active; many do not even vote their shares. This contrasts sharply with the approach of their global peers like Norway’s Norges Bank, which in recent years has fought poorly governed firms and divested from polluting industries like coal.
Middle Eastern and North African SWFs’ reluctance to engage in the governance of their portfolio investments abroad may be a legacy of the “investment protectionism” of the Santiago Principles days. But, in the world of today, investors need to change their ways, engaging more effectively with the companies, both at home and abroad. Otherwise, they may face serious financial and reputational risks, exemplified in QIA’s losses following Volkswagen’s 2015 emissions scandal. The importance of engagement is also highlighted by the terms of recent acquisitions, such as PIF’s purchase of a stake in Uber, which gave it the right to nominate a board member to represent its interests.
It is with regard to domestic firms that Middle Eastern SWFs have the most urgent responsibility, especially considering that most other institutional investors in these markets are also inactive when it comes to corporate governance. As some of largest public equity investors in the region, SWFs should be encouraged to take more responsibility for their investments.
Indeed, the only way SWFs can safeguard wealth for future generations – fulfilling the purpose for which they were established – is to participate meaningfully in corporate governance.
domingo, febrero 26, 2017
NOT LOSING IT: THE ELDERLY, COGNITIVE DECLINE AND BANKING / THE ECONOMIST
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Etiquetas:
Banks And Banking
Not losing it
The elderly, cognitive decline and banking
Banks need strategies for helping vulnerable elderly customers
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No cheques and balances
“THE older the wiser” may ring true for much of life, but not for our ability to handle money.
Studies suggest financial decision-making ability tends to reach its peak in a person’s mid-50s, after when deterioration sets in. “Age-friendly” banks are beginning to learn how to protect vulnerable older customers.
The most dramatic forms of age-related mental deterioration are neurodegenerative diseases, like Alzheimer’s. But even “normal” ageing can cause cognitive change. Financial-management skills are often early casualties, because they demand both knowledge and judgment.
Older people are more likely to struggle with day-to-day banking and are more susceptible to poor investment decisions. They are also more vulnerable to fraud or to financial exploitation, often by relatives. In 2010 the over-65s in America made up 13% of the population but had over a third of the wealth. British pensioners became especially vulnerable when reforms in April 2015 allowed them to withdraw savings previously locked up. Newspapers fretted that people would splurge their pensions on Lamborghinis. A greater concern should have been that they became easy prey for scammers. By March 2016 cold-callers had approached more than 10m people about their pensions, according to Citizens’ Advice, a charity.
It is difficult to monitor financial abuse, because victims rarely report it. True Link Financial, a financial-services firm, estimates annual losses in America from financial exploitation and abuse of the elderly at between $3bn and $37bn. In Britain the Financial Conduct Authority has issued warnings about investment-fraud schemes, coaxing the elderly into trading their savings for shares, wine or diamonds (which never arrive).
The older brain seems more susceptible to “too good to be true” scams, from lotteries to dating schemes. According to the “Scams Team” at Britain’s National Trading Standards, a consumer-protection body, the average age of victims of mass-marketing scams is 75. Louise Baxter, the team’s manager, says cognitive decline in older people is a risk factor that criminals exploit, and the dangers are likely to rise in tandem with the incidence of dementia. Phil Mawhinney, from Age UK, a charity, says people living alone, as half of Britons over 75 do, are more likely to be befriended by a fraudster. So-called “sucker lists” of easy targets circulate among criminals.
Banks have been slow to respond, at first seeing these risks as purely a matter for customers. (As one manager puts it, they “have the liberty to make dumb financial decisions.”) Most “age-friendly” measures have focused on physical limitations (such as talking ATMs for the blind) or helping people get online. However, many banks are recognising cognitive decline as their problem, too. Barclays, a British bank, uses voice recognition to help customers who have trouble with passwords. Banks are training staff in how to spot dementia and signs of financial abuse. First Financial Bank, in America, gives staff who uncover a scam a “Fraud Busters” pin.
And better ways to identify fraud are popping up: algorithms can help staff detect changes in spending patterns. Barclays used data from old cases to pinpoint 20,000 high-risk customers, whom it monitors and advises.
The trickiest issue for banks, ethically and legally, is how and when to act on concerns over a client’s ability to manage money. The last-resort measure, most commonly used for the incapacitated, is a power of attorney, usually given to a family member chosen in advance. But this can put people at risk of opportunistic relatives. It may also curtail autonomy too severely.
Banks are experimenting in this grey area, for example by giving relations “read-only” access to accounts, so they can monitor payments, or by allowing the bank to delay a payment and contact advisers if it is worried. A limited form of power of attorney, with authorisation for only certain payments, is also emerging.
Much of the financial damage done by cognitive decline results from late detection of problems. A decline in someone’s financial skills can be an early warning of dementia or other problems. Jason Karlawish, an expert on Alzheimer’s at the University of Pennsylvania, thinks banks—and their technology—are uniquely placed to identify older people who are at risk and refer them to doctors or social workers. He coined the phrase “Whealthcare” to describe how looking after people’s money can give insights into their health. “If you do it right, I think customers will like it,” he adds. “Nobody wants to lose their money and certainly not their brain.”
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